1974 (5) TMI 13 - HC - Income Tax

Factory Building, Income From Business, Income From House Property, Income From Letting Out, Income From Other Sources, Rental Income

Issues:

1. Assessability of rent from factory sheds and electric installations under section 28 or section 56(2)(iii) of the Income-tax Act, 1961.
2. Assessability of rent from non-factory buildings including godowns under the head 'Business' or section 22 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Assessability of Rent from Factory Sheds and Electric Installations:

The primary issue was whether the rent received from factory sheds and electric installations should be assessed under section 28 (Profits and gains of business or profession) or section 56(2)(iii) (Income from other sources) of the Income-tax Act, 1961. The assessee-company, incorporated on July 31, 1959, had not commenced its manufacturing business due to the unavailability of certain machinery. Consequently, the assets, including factory sheds and electric installations, were let out. The Income-tax Officer initially assessed the rental income under the head "Property" or "Other sources."

The Tribunal found that the factory shed with electrical installations was peculiarly suited only for manufacturing purposes. The high tension wires and transformers installed could only be utilized along with the factory shed. Since the assessee had not commenced the business of manufacture, the Tribunal held that the hire of factory sheds and electrical installations fell within the scope of section 56(2)(iii) of the 1961 Act.

The department argued that the rent received should be assessed under section 22 (Income from house property) and not under section 28 or section 56(2)(iii), contending that the true intention of letting out the assets was not clear due to the absence of written agreements.

The court, however, concluded that the rent received from the factory sheds and electric installations was assessable under section 56(2)(iii) of the Income-tax Act, 1961. The court noted that the assets were inseparable and could not be utilized separately from the factory sheds, aligning with the principles enunciated by the Supreme Court in Sultan Brothers Private Ltd. v. Commissioner of Income-tax.

2. Assessability of Rent from Non-factory Buildings Including Godowns:

The second issue was whether the rent from non-factory buildings, including godowns, should be assessed under the head 'Business' or section 22 of the Income-tax Act, 1961. The Tribunal found that the assessee had utilized the factory buildings, including godowns, for its own business of purchase and sale of pipe fittings and only let out the surplus portion. Consequently, the Tribunal held that the rental from non-factory buildings was assessable under the head "Business."

The department contended that the income derived from such letting out could not be considered business income as the object clauses of the memorandum of association did not indicate that letting out properties was part of the assessee's business.

The court held that the income derived by the assessee by way of rent from the non-factory buildings, including godowns, was business income. The court observed that the non-factory buildings and godowns were commercial assets utilized by the assessee for its business purposes, and the surplus portions were let out. The income derived from such letting out was considered to be business income, aligning with the principles established in previous Supreme Court decisions.

Conclusion:

The court answered the first question by holding that the rent received from the factory sheds and electric installations was assessable under section 56(2)(iii) of the Income-tax Act, 1961. The second question was answered in the affirmative, stating that the rent from non-factory buildings, including godowns, was assessable under the head "Business." The court also noted that the reference application by the department was not justified given the meager amount of tax involved and the well-settled principles. The department was directed to pay the costs of the reference to the assessee.

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