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TMI Blog1996 (7) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... g commission paid to V. S. T. Padmanabhan and Bros., is an admissible deduction ? (3) Whether the Appellate Tribunal's view that V. S. T. Padmanabhan and Bros., had rendered services to the assessee-company to warrant payment of commission of Rs. 34,100 is based on relevant and valid materials and is sustainable in law ? The assessee is a company carrying on business as authorised dealers in Tata diesel vehicles at No. 34, Mount Road, Madras-2. The building consisted of three floors including the ground floor. While the ground floor and the first floor were used for the assessee's business, the second floor was let out to the Government department. In the assessment years 1975-76 and 1976-77, the assessee claimed that the rental receipts from the second floor should be considered under the head " Business " as the entire property was constructed with a view to use the same for the purpose of its business and that the surplus accommodation, due to its shifting of branches to outside Madras, available was let out on lease and, therefore, the rental income should be considered as business income. The Income-tax Officer did not accept the assessee's contention and treated this inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t should be assessed under the head " Income from property " and it cannot be assessed under the head " Business income ". According to learned standing counsel, the house property should be assessed under the provisions of section 22 of the Act, since the second floor is not being used for the business of the assessee. It was further submitted that the assessee had no intention to exploit the second floor of the building as a commercial asset. According to learned standing counsel, the second floor was let out to the Government department because the assessee found that the second floor is a surplus portion, which cannot be utilised by the assessee for its business purposes. Inasmuch as the surplus not required for the assessee's business was let out, it should be assessed under section 22 of the Act. Letting out of the property is not the business of the assessee. Letting out the second floor, which is surplus, would not amount to exploitation of a commercial asset. For these reasons, it was submitted that the Tribunal was not correct in holding that the second floor, which was let out by the assessee and the rental income derived therefrom should be assessed as business income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time it was let out be in a condition to be used as a commercial asset by the assessee himself is not correct." Reliance was placed upon the decision of this court rendered in CIT v. Pandyan Bank Ltd. [1969] 71 ITR 707 in order to support the contention put forward by the Department. In the abovesaid decision, the facts are as under : " The assessee-bank owned a building which was air-conditioned. A small portion of the said building had been let out to two tenants, both of whom were entitled to air-condition facilities under the terms of the tenancy. In respect of the cost of the machinery for the air-conditioning, the assessee claimed both depreciation and development rebate. The claim for development rebate was disallowed by the officer and the Appellate Assistant Commissioner on the ground that as a portion of the building had been let out, the air-conditioning machinery or plant was not wholly used for the purpose of the business of the assessee. The Tribunal, however, granted the claim on the view that, as the plant was one whole serving the entire premises, it could not be bifurcated to serve portions of the premises and hence the plant was used for the purpose of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercial asset is capable of being exploited as such, its income is business income irrespective of the manner in which the asset is exploited by the owner of the business. He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else ; (vi) if the commercial asset is not capable of being used as such or as a commercial asset, then its being let out to others does not result in the accrual of business income ; (vii) when the assessee has stopped doing business altogether and when the asset ceases to have the character of a business or a commercial asset, it becomes a capital asset. Qua such asset, the assessee is not carrying on any business. As the owner of the asset, he may exploit such asset but, in such circumstances, income which he receives is no longer business income but income from property owned by him ; (viii) when the asset is in the nature of land or building capable of being used for any other purpose and when the assessee ceases to use it as a commercial asset either himself or even through others, the income derived by him by renting out the same would more appropriately fall under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is business income irrespective of the manner in which the asset is exploited by the owner of the business. He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else. Fourthly, the court noticed that if the commercial asset is not capable of being used as such or as a commercial asset, then its being let out to others does not result in accrual of business income. " In the case of Parekh Traders v. CIT [1984] 150 ITR 310, the Bombay High Court, while considering the provisions of section 23(1) of the Income-tax Act, 1961, held that : " The heads of income enumerated in section 14 of the Income-tax Act are mutually exclusive and each specific head covers items of income arising from the specific source. Income derived as rent from property must be computed under that specific head regardless of the fact that that property had at one time been utilised by the assessee for business purposes. Such property cannot be treated as a business asset and the rent thereof as income from business. A distinction must be drawn between the letting out of land or house property on the one hand and of plant o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee-company as could be seen from clause 3(A)(i) of its memorandum of association was to purchase, take on lease or mortgage or otherwise acquire and possess lands, buildings or real estates, freehold or otherwise, lands with their superstructures and appurtenances, whether movable or immovable. In order to attain the aforesaid main object of the company, clause 3(B)(i) of the memorandum of association stated that an incidental or ancillary object was to undertake to sell or lease, or mortgage the whole or part of any property, land, buildings, structures, movable or immovable of the company in furtherance of its objects. For the assessment years 1969-70 and 1970-71, the assessee showed the rental income from properties acquired by it as income from business. Inasmuch as the object of the company was to acquire and possess properties and since there was no indication that the assessee-company intended to sell those properties or even turn them to account by way of leasing them as part of its business activities, this court held that the properties were not held by the assessee as part of the business assets and the income therefrom was assessable as income from property. This c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic head described in section 9. The character of that income was not altered because it was received by a company formed with the object of developing and setting up markets. Nor because of the fact that the company was required to obtain a licence from the Calcutta Municipality to maintain sanitary and other services and for that purpose had to maintain staff and to incur expenditure, did the income become " profits or gains " from business within the meaning of section 10. Nor was the character of the income altered merely because some stalls were occupied by the same occupants and the remaining stalls were occupied by a shifting class of occupants. The primary source of income from the stalls was the occupation of the stalls and it was a matter of little moment that the occupation which was the source of income was temporary. Inasmuch as the business of the assessee was promoting and developing markets and inasmuch as it is not the business of the company for letting out the property and earning the rental income, the Supreme Court held that the income derived from the occupants of the shops should be taxed as income from property, since the property in question has no nexus t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing in Narayandas Kishandutt v. CIT [1984] 149 ITR 636 (MP), the assessee, which carried on business at its head office and at a number of branches, claimed during the relevant assessment year that the rental income from the letting of the various godowns and factories should be assessed under the head " Income from business " and not as " Income from property " on the ground that the letting amounted to exploitation of commercial assets and was incidental to the business of the assessee. The claim made by the assessee was negatived since there was no material placed by the assessee in order to show that the letting of the factories and godowns was an act of commercial expediency or that it was incidental to the business of the assessee. Therefore, the rental income from the factories and godowns received by the assessee was directed to be assessed under the head " Income from property ". This decision was rendered on the facts arising in that case. Inasmuch as the assessee failed to produce evidence to show that the letting out of the factories or godowns was for commercial expediency or it was incidental to the business of the assessee, the rental income could not be assessed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter actual user of portions for its own business. The assessee claimed that the rental income derived from the non-factory buildings including godowns should be assessed under the head " Business income ". The Calcutta High Court held that the income derived from the surplus of the non-factory buildings including godowns, was the business income of the assessee. In CIT v. B. Nagi Reddy [1984] 147 ITR 337, this court while considering the nature of the income derived from the lease of cinematograph studios held that whether a particular letting is a business has to be decided in the circumstances of each case and each case must be decided in the setting and background of its own facts. There is no such thing as a naturally born commercial asset because an asset becomes a commercial asset in view of the use to which it is put in a business and not because of any inherent qualities. On the facts, it was found that the assessee had been utilising these two studios as lessee on earlier occasions and even after purchase, he had made a film of his own in one of them. Considering these facts it was held that the assessee was treating these studios as commercial assets. Therefore, the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessable under the head " Property income ". On the facts, the Tribunal found in the present case that the property at No. 34, Mount Road, is a commercial asset, which was used by the assessee as such in the beginning and later on after shifting its branches to outside stations, the second floor has become surplus, which was exploited by the assessee by letting it out to others and therefore the rental income derived therefrom is rightly assessable under the head " Business income ". Accordingly, we answer question No. (1) referred to us in the affirmative and against the Department. Questions Nos. (2) and (3) will go together. The point for consideration is whether the commission paid to V. T. Padmanabhan and Bros., is an admissible deduction and whether the said V. T. Padmanabhan and Bros., rendered any service to the company to warrant payment of commission of Rs. 34,100. This point relates to the assessment year 1975-76. The assessee paid a commission of Rs. 34,100 to V. T. Padmanabhan and Bros., a sister concern. The reasons for the disallowance were that V. T. Padmanabhan is a director of the assessee-company and is also interested in the firm. Some employees were working f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lachminarayan Madan Lal v. CIT [1972] 86 ITR 439, wherein it was held that mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, alone is not sufficient for allowing the commission payment as deduction. On the other hand, learned counsel appearing for the assessee submitted that the assessee has produced the agreement to show the payment of commission for the services rendered by V. T. Padmanabhan and Bros. The said firm was the canvasser for the business of the assessee-company. Therefore, commission payment was payable by the assessee-company to the said firm. In the earlier years, such commission payments were allowed. In the case of a sister concern India Garage also, such commission payment was allowed. Therefore, in the present assessment year under consideration, there is no ground for disallowing such commission payment by the Department. For disallowance of commission payment, the Income-tax Officer has enumerated various grounds in his order. The Tribunal found that those grounds by themselves do not support the view taken by the Income-tax Officer to disallow the commission payment. The Tribunal has see ..... X X X X Extracts X X X X X X X X Extracts X X X X
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