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TMI Blog1987 (12) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... 1976-77 the return showed loss of Rs. 270 under the head "Business" (interest Rs. 49 less expenses Rs. 320) but was assessed at Rs. 20,000 under section 144 of the Act and in reassessment was assessed at nil income. Assessment year 1977-78 : 5. For assessment year 1977-78, with which we are concerned in the first of the five appeals, the return showed a business loss of Rs. 35,206 after debiting interest and other reexpenses against rental income of Rs. 18,000. Initially assessment was made under section 144 but subsequently under section 143(3). In the final assessment dated 3-2-1982 the Income-tax Officer assessed Rs. 18,000 as income from other sources being gross rent received. The Income-tax Officer observed that assessee did not give clarification regarding property from which rent was received and that assessee had not taken into account the interest that had accrued in the relevant year. Interest payments were treated as expenses on acquisition of capital assets and not allowable as the business, had not commenced. 6. Against this assessment order dated 3-2-1982, there was an appeal before the Commissioner of Income-tax (Appeals) and then before the Tribunal. Before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was income from other sources as the assessee had not acquired legal title to immovable property in the relevant year. 9. As regards interest income, the Income-tax Officer held that the same could not be assessed as business income. The interest accrued to assessee on advances made to Roger Enterprises was assessed as income from other sources and interest paid on borrowed funds from which the said advances had been made was allowed as deduction in computing the said interest income as income from other sources while the balance of interest was allowed against rental income. The Income-tax Officer computed net loss under the head "Other sources". Against this fresh assessment order the assessee came in appeal before the Commissioner of Income-tax (Appeals). 10. The ground to the effect that the assessee followed mixed system of accounting regarding interest by treating income by way of interest on cash basis and expenses by way of interest on increment basis and as such accrued income should not be assessed as income and interest incurred should be allowed as liability was given up by the assessee before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set and act of giving on rent is regarded as exploitation of the commercial asset in the ordinary course of business. For deciding this, we have to look to all.the surrounding circumstances. 14. The most important circumstance in the present case is the conduct of the directors at the time of acquiring the above property. From this conduct, we have to draw inference regarding the intention with which the property was acquired. The directors, in their report dated 1-12-1976 to the shareholders in respect of the year ended 30-6-1976 stated as follows : "During the year under review, the company has acquired land and building and other property from M/s. Star Textiles Ltd. and land from M/s. N. P. Industries in the Industrial Estate of Faridabad, Haryana with an object to put some industrial plant very shortly." From this report it is clear that at the time of acquisition of these properties, the intention was to install some industrial unit. The object was not to let out on rent. 15. The learned counsel for the assessee drew our attention to the objects in the Memorandum of Association which we have extracted in paragraph 2 of our order. It was submitted that one of the objects o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the object of letting out in terms of one of the objects in the Memorandum. Thus letting out had occurred at the pre-commencement stage in respect of business of manufacture and processing of textiles and not in the course of the said business. Hence, income from letting out could not be regarded as business income. 19. It was then submitted by the learned counsel for the assessee that although the business for which the property had been acquired had not commenced, yet the income from letting out should be regarded as business income because the property in question had acquired the characteristic of commercial asset and letting out of said property was nothing but exploitation of said commercial asset and that income derived from exploitation of commercial asset was business income, Reliance was placed on the decision of the Calcutta High Court in CIT v. Prem Chand Jute Mills Ltd. [1978] 114 ITR 769. 20. The above submission cannot be accepted. In the decision of Calcutta High Court the assessee-company had been carrying on business of manufacture of jute goods for several years and subsequently it became difficult to carry on manufacturing activity because of quarrels amon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is stopped, then the assets employed in such business cease to be commercial assets." 24. In that case the assets which were once commercial assets were let out after the business was stopped. The High Court held that the assets ceased to be commercial assets once the business stopped because commercial assets were assets of a running business. The High Court distinguished the decision of the Supreme Court in CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 which was a case of temporary suspension of a running business with intention to revive business again in future from the case of stopping of business. The principle followed by Allahabad High Court would also apply to a case where the business has not commenced at all. Since the business had not commenced at all, the immovable property in question could not be regarded as assets of a running business (which includes a temporarily suspended business) and since in order to be a commercial asset, the asset should be of a running business, the immovable property with which we are concerned could not be regarded as a commercial asset and the income principle underlying Allahabad High Court decision supports the view which w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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