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Issues Involved:
1. Whether a portion of the capital cost of the buildings leased to others should be excluded from the computation of capital employed in the business under the Excess Profits Tax Act. 2. Whether the rental income from the buildings should be treated as part of the business profits for the purpose of the Excess Profits Tax Act. Detailed Analysis: Issue 1: Exclusion of Capital Cost of Leased Buildings The primary question referred to the court was whether, under the Excess Profits Tax Act, a portion of the capital cost of the buildings leased to others could be excluded from the computation of capital employed in the business of the company. The relevant period for this case was from January 1, 1944, to December 31, 1944. The assessee company had constructed a new building known as "Dare House" at a cost of Rs. 6,80,000, partially financed by debentures. A resolution passed in 1940 by the directors decided to lease portions of both the old and new buildings for rent. Consequently, half of the new and old buildings were let out, and the company paid income-tax on the rental income under Section 9 of the Income-tax Act, without claiming these rents as part of business profits for the Excess Profits Tax Act. During the chargeable accounting period, the assessee contended that the rental income should be considered part of its business profits and that half the cost of the buildings should be included in the capital employed for the Excess Profits Tax Act. However, this contention was rejected by the department and the Appellate Tribunal. Issue 2: Treatment of Rental Income as Business Profits The court examined whether the erection and letting of the building should be considered part of the business activities of the assessee company. The definition of "business" under Section 2(5) of the Excess Profits Tax Act includes two provisos: 1. If a company's functions consist wholly or mainly in holding investments or property, this is deemed a business. 2. All businesses carried on by the same person are treated as one business. The court noted that the first proviso applies to companies incorporated under an enactment and expands the definition of business to include holding property for earning income. The second proviso treats multiple businesses as a single unit for the purposes of the Act. The court also referred to Schedule I, rule 4(4), which states that in businesses partly involving letting out property, the income from such property is included in business profits for the Excess Profits Tax Act. The court reconciled the apparent conflict between the proviso and sub-rule by interpreting the second proviso to mean that all businesses of a company are treated as one unit. Analysis of the Memorandum of Association The court scrutinized the memorandum of association of the assessee company, which authorized the company to acquire and deal with property only for the purpose of its business. The court concluded that the construction and letting of buildings were not within the objects of the company as per its memorandum of association. The acquisition of property for business purposes is distinct from acquiring property as the business itself. Precedents and Comparative Cases The court referred to several precedents: 1. Commissioner of Income-tax, Madras v. Gin and Rice Factory, Guntur: Leasing a factory with machinery was considered part of the business. 2. Commissioner of Income-tax, Madras v. Bosotto Brothers: Leasing a hotel was part of the business due to specific authorization in the memorandum of association. 3. Valliappa v. Commissioner of Income-tax, Madras: Income from properties acquired during the course of money-lending business was considered business profits. The court distinguished these cases based on the specific provisions in the memorandum of association and the nature of the business. Conclusion The court concluded that the letting of property by the assessee company did not constitute a business within the meaning of the Excess Profits Tax Act. Consequently, the profits and capital from the leased buildings should not be included in the computation of business profits or capital employed under the Act. The question was answered against the assessee, and the assessee was ordered to pay costs of Rs. 250 to the Commissioner of Income-tax. Reference Answered Accordingly.
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