TMI Blog1979 (9) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... er, on the facts and in the circumstances of the case, the Tribunal was right in holding that the one-half of the profits of the previous years should be added to the capital computation for purposes of calculating the relief under section 84 ? (3) Whether, on the facts and in the circumstances of case, the ITO was justified in estimating the annual letting value of the premises in question at Rs. 96,000 notwithstanding the fact that the quarters had already been let out to the Modi Industries Ltd. for a rent of Rs. 27,462 ? M/s. Modi Spinning and Weaving Mills Co. Ltd., Modinagar hereinafter referred to as the assessee, is a public limited company carrying on business at Modinagar. The assessment year involved is 1965-66, the corresponding accounting period ended on April 30,1964. The ITO made several additions and disallowed certain expenses claimed by the assessee, one of which was entertainment expenditure and the question referred at the instance of the assessee relates to the same. The assessee had debited a sum of Rs. 1,14,448 to the mess account in the accounts of its head office and of different units. Out of that amount a sum of Rs. 32,016 had been paid to the local r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it had been set up from borrowed funds and if the liabilities payable in that behalf be excluded, the capital employed in this business would come to nil and, lastly, the computation of profit at Rs. 90,330 was not correct. When the matter came up in appeal before the AAC two additional grounds were urged in respect of this claim on behalf of the ITO and they were that, firstly, the sales of the pressed cotton had been made to the other units of the assessee at rates higher than the market value and this could not be done; and, secondly, it was a case of expansion and could be said to have been formed as a result of the reconstruction of a business already in existence and as such was not entitled to exemption. The AAC accepted this last ground and upheld the disallowance of the claim.In second appeal it was urged before the Appellate Tribunal on behalf of the assessee that the Abohar Ginning Press was an independent and economically viable unit and a substantial amount had been invested in it. This unit was bigger than the ginning unit which the assessee already had at Patiala. The production of this unit amounted to a crore of rupees out of the total turn over of Rs. 9 crores m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rebate under s. 84 of the Act on profits amounting to Rs. 90,330, being equivalent to 5% of the capital employed in the aforesaid unit. In working out the capital employed, the assessee had added one-half of the profits earned in the year of account and claimed that it may be treated as part of the capital employed in this undertaking in view of the provisions contained in r. 19(5) of the I.T. Rules, 1962. The AAC did not accept the assessee's claim since in his opinion "that the sub-rule is not an authority for making this addition because it is nowhere so said. Moreover, when the value of the assets for the purpose of capital computation has been taken to be the opening balance and proportionate value of the additions, the profits earned during the year has already been taken into account and any separate addition on this score to the working of the capital would mean double addition." Hence, he excluded the aforesaid amount of Rs. 40,223 from the computation of capital employed in this undertaking. The Appellate Tribunal took a contrary view and according to it r. 19(5) is very clear and explicit and there is no scope for any argument of implied double addition. This sub-rule sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of s. 84, as it stood before April 1, 1968, in accordance with r. 19(5) of the Rules, the profits derived from a new undertaking during the previous year relevant to the assessment year are to be included in determining the capital employed in the new undertaking. The rule was held to be clear and unambiguous and not capable of any other interpretation. Similar view has been taken by the Gujarat High Court in CIT v. Elecon Engineering Co. Ltd. [1976] 104 ITR 510. In our opinion, therefore, the Appellate Tribunal was right in holding that half of the profits of the relevant previous year was to be added for computing the average capital employed in the assessee's new undertaking under r. 19(5). Now, coming to the last question referred at the instance of the Commissioner, the brief facts are these: The assessee had constructed a large number of quarters in 1948. Those quarters were just opposite to the factory building of M/s. Modi Industries Ltd. and the intention was to let out those quarters to that concern. Soon after the construction of the quarters the premises were let out to Modi Industries Ltd. Subsequently, the assessee required some of the quarters for its o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable : ...... .." It would be seen that under the head "House property" the tax is on income. However, it is not a tax on rent but upon the inherent capacity of the hereditament to yield profit. The question that falls for consideration is as to what should be the basis for estimating the annual value of a property which is actually let out on rent and as in the present case it is not disputed that the rent received in accordance with the agreement arrived at between the parties would be treated as a fair and reasonable rent within the meaning of the U. P. (Temporary) Control of Rent and Eviction Act (U. P. Act 3 of 1947). In other words the letting out of the property is subject to limitations provided in that Act and those limitations are with regard to ejectment of the tenant and enhancement of rent. The interpretation of the words "the sum for which the property might reasonably be expected to let from year to year" occurring in some other statutes had come up for consideration before the Supreme Court in several cases. In Corporation of Calcutta v. Sm. Padma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section is on the sum for which a property might reasonably be expected to be let from year to year. In other words, the whole concept of annual value is hypothetical tenancy and that being so the ITO was right in estimating the annual letting value of the premises in question at Rs. 96,000. Reliance has been placed on certain decisions in this behalf. In Liquidation, Mahmudabad Properties Ltd. v. CIT [1972] 83 ITR 470 (Cal), at page 475, it was laid down that in the context of ss. 22 to 24 what is charged is the annual value of the property. That annual value is deemed to be the same for which the property might reasonably be expected to let from year to year and it follows that it is a deeming provision and is based on the idea of hypothetical tenancy. It was observed (p. 475) : " It insists on the sum for which the property might reasonably be expected to let from year to year indicating thereby that it is 'the' property which is to be considered emphasising the well-known principle of rebus sic stantibus in this branch of law. In other words, the property has to be considered as it is at the time of the valuation for determination of the annual value." It was also laid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g what receipts are to be included in the total income explained as under (p. 433): " That all income included in total income is not chargeable to tax may be illustrated by referring to income from the source mentioned in the third head in section 6, namely 'Income from property'. The corresponding computing section is section 9 which says that tax shall be payable on income under this head in respect of bona fide annual value of property. It is conceivable that income actually received from the property in a year may exceed the notional figure. The excess would certainly be liable to be included in total income under section 4. It however cannot be brought to tax as income under the head 'Other sources': See Salisbury House Estate Ltd. v. Fry [1930] 15 TC 266 (HL). It is an income which cannot be taxed at all, though it is included in total income as defined in section 4." It would appear, therefore, that s. 23(1) contemplates not the actual rent received by the owner of the property, but a notional one. It is a deeming provision and requires a hypothetical tenancy to be taken into consideration. However, if actual rent is received, that would be an important factor for the t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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