COMMISSIONER OF INCOME TAX VS ANAND RUBBER AND PLASTICS (PVT) LTD.

1991 P T D 719

[Punjab and Haryana High Court (India)]

Before Gokal Chand Mital and S.S. Sodhi, JJ

COMMISSIONER OF INCOME TAX

versus

ANAND RUBBER AND PLASTICS (PVT) LTD.

Income-tax References Nos.82 to 84 of 1978, decided ort 4 November, 1988.

Income-tax---

----Income--Rent from leasing property whether income from property or business income depends on facts of particular case-girt of factory premises leased out to decrease losses--Rent will be assessable as business income.

In order to determine whether rent is assessable as income from property or business income, what has to be seen is whether the asset is being exploited commercially by letting out or whether it is being let out for the purpose of enjoying the rent. The distinction between the two is a narrow one and has to depend on certain facts peculiar to each case.

The object of the assessee-company was to manufacture rubber goods. The factory premises of the assessee consisted of three portions, the main building, a front shed and a rear shed. In order to curtail the losses, production was reduced with the result that the rear shed became surplus. The rear shed was leased out with a view to reduce the losses. On the question whether for the years 1971-72, 1973-74 and 1974-75, the rent was assessable as business income:

Held, that the facts clearly showed that the shed was leased out temporarily as a commercial asset. The rent was, therefore, assessable as business income.

C.I.T. v. Super Fine Cables (Pvt.) Ltd. (1985) 154 ITR 532 (Delhi) 'applied.

New Savan Sugar and Gur Refining Co. Ltd. v. C.I.T. (1969) 74 ITR 7 (SC) ref.

Ashok Bhan, Senior Advocate, and Ajay Mittal for the Commissioner,

S.S. Mahajan for the Assessee.

JUDGMENT

GOKAL CHAND MITAL, J.---The Income-tax Appellate Tribunal, Chandigarh Bench, has referred the following question for the opinion of this Court:--

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the rental income derived by the assessee-company for the assessment years 1971-72, 1973-74, and 1974 75 from letting out of a part of the factory building constituted `business income?"

Anand Rubber and Plastics (P.) Ltd., Faridabad, the assessee, is a private limited company incorporated in the year 1963. The objects of the company included manufacture of all types of rubber goods from natural and synthetic rubber components, mattresses, pillows, sheets and solutions, etc. To carry out the objects, the assessee installed a plant for the manufacture of cycle and rickshaw tyres, rubber sheets etc. The factory premises consisted of three portions, the main building, the front shed and the rear shed. The main building comprised an area of 12,500 sq. feet, the front shed 6,000 sq. feet and the rear shed 4,000 sq. feet. In the first few years, the assessee incurred heavy losses due to various difficulties and the quality of the products being not up to the mark. As a result, it ran into financial difficulties. To curtail the losses, the production was reduced with the result the rear shed became surplus and to reduce the business losses, the rear shed was given on lease for the period of 11 months on a monthly rent of Rs.1,480 to Maheshwari & Co. P. Ltd., vide lease deed dated September 1, 1970. For the assessment year 1971-72, the rental income of Rs.10,720 was shown as a part of business income but the Income-tax Officer treated the rental income as income under the head "Property" and after allowing 1/6th for repairs, the balance was included in the taxable quantum.

For the assessment year 1972-73, the rental income was shown by the assessee under the head "Business" and this time the Income-tax Officer accepted the assessee's claim.

For the next two assessment years 1973-74 and 1974-75, the assessee claimed the rental income as business income but the Income-tax Officer did not accept it and after allowing permissible deductions from the rental income for repairs, etc., the same was treated as income under the head "Other sources" and not as business income. For the years 1971-72, 1973-74 and 1974-75, the assessee took the matter in appeal before the Appellate Assistant Commissioner who accepted the contention of the assessee and held that by giving the factory premises on lease, the assets did not cease to be commercial assets and treated the rental income as income from business. Against the aforesaid, the Revenue came up in appeal before the Tribunal. On consideration of the matter, the Tribunal recorded the following findings:

"We have heard the parties and considered the matter. We are of the view that the Department does not have a strong case and the assessee must succeed. The learned Department representative was not in a position to controvert the facts as stated by the learned counsel for the assessee. It is not disputed that the assessee had run into heavy losses. In fact, while computing the income for the year 1973-74, the Income-tax Officer adjusted a sum of Rs.23,537 from the brought forward losses of the earlier years and in 1974-75, the brought forward loss was Rs.2,30,474. In 1974-75, the resultant business loss was computed by the Income-tax Officer at Rs.1,08,600. We are inclined to agree with the Appellate Assistant Commissioner that a temporary leasing out of a part of the commercial asset would not convert that part of the commercial asset into house property, income from which could be calculated as `income from property' only. The assessee had relied on a number of decisions before the Appellate Assistant Commissioner. In fact, there could be no dispute that in such circumstances, the hire income from letting out of a part of the commercial asset would call for being considered as the business income of the lessor. The main part of the factory building was continued to be used by the assessee-company for its own business activities and only that part of the building which could not be exploited by the assessee-company was let out for a short while by it to some other manufacturing concern. We, accordingly, see no reason to interfere with the order of the Appellate Assistant Commissioner in this regard and uphold the same."

As a result, the decision given by the Appellate Assistant Commissioner was maintained by the Tribunal.

After hearing learned counsel for the parties and on a consideration of the matter, we are of the view that, on the facts of the case, the Tribunal was right in holding that the rental income derived by the assessee for the three years in question from letting out a part of the factory building constituted business income. One of the earlier decisions was rendered by the Supreme Court in New Savan Sugar and Gur Refining Co. Ltd., v. C.I.T. (1969) 74 I.T.R. 7, wherein the rental income received on letting out the entire factory premises was held to be the rental income from other sources and not business income. The Delhi High Court in C.I.T. v. Super Fine Cables P. Ltd. (1985) 154 I.T.R. 532, had occasion to deal with this matter and, after referring to a large number of authorities, came to the following conclusion (at page 536).

"Thus, in each case, what has to be seen is whether the asset is being exploited commercially by the letting out or whether it is being let out for the purpose of enjoying the rent. The distinction between the two is a narrow one and has to depend on certain facts peculiar to each case."

Even before the Delhi High Court, the entire factory premises were let out and there was no material to show that the letting out was commercial motivation and, therefore, was treated as income from "Other sources."

Adverting to the facts of the case, it is clear that the entire premises were being used by the assessee for running its factory but due to heavy losses, the production was reduced with the result that rear shed became surplus and to minimise losses, the rear portion was temporarily leased out as a commercial asset. Hence, the Tribunal was right in considering the income as business income. Moreover, on the peculiar facts of this case, we are of the opinion that hardly any question of law arises and largely it is a question of fact.

Accordingly, we answer the question in the affirmative, i.e. against the Revenue, but with no order as to costs.

Z.S./718/TOrder accordingly.