COMMISSIONER OF WEALTH TAX VS GOVIND PRASAD KANUDIA
1993 P T D 544
[198 I T R 122]
[Calcutta High Court (India)]
Before Ajit K. Sengupta and Shyamal Kumar Sen, JJ
COMMISSIONER OF WEALTH TAX
versus
GOVIND PRASAD KANUDIA
Matter No. 3126 of 1990, decided on 16/05/1991.
Wealth Tax---
----Exemption---Industrial undertaking---Partner---Condition precedent for partner claiming exemption under S.5(1)(xxxii), Indian Wealth Tax Act, 1957-- Industrial undertaking should belong to firm---Firm giving industrial undertaking on lease---Partner entitled to exemption---Indian Wealth Tax Act, 1957, S.5(1)(xxxii).
In order that a partner may claim exemption under section 5(1)(xxxii) of the Wealth Tax Act, 1957, the primary condition to be satisfied is that the assets of the industrial undertaking must "belong" to a firm or an association of persons of which the assessee is a partner.
The assessee was a partner of K firm which owned a flour mill. The flour mill was an industrial undertaking within the meaning of section 5(1)(xxxii) of the Wealth Tax Act, 1957. In 1976, the firm gave the flour mill to GV on a leave and licence basis. The licence was originally granted for three years but GV had been running the mill even after the expiry of the period. The Wealth Tax Officer granted exemption to the assessee for the assessment years 1982-83 and 1983-84 under section 5(1)(xxxii). But the Commissioner of Wealth Tax passed an order under section 25(2) of the Act directing the Assessing Officer to withdraw the exemption. The Tribunal vacated the order of the Commissioner of Income-tax. On a reference:
Held, that the ownership of the industrial undertaking vested in the firm itself and this was clear from the agreement entered into with GV. The assessee was, therefore, entitled to exemption under section 5(1)(xxxii).
CWT v. C.S. Rao (1988).174 ITR 612 (AP) fol.
CIT v. Prem Chand Jute Mills Ltd. (1978) 114 ITR 769 (Cal.); CWT v. Lakshmi (K.) (1983) 142 ITR 656 (Mad.) and CWT v. Shenbagamoorthy (P.T.N.) (1983) 144 ITR 724 (Mad.) ref.
JUDGMENT
SHYAMAL KUMAR SEN, J.---By the reference application under section 27(1) of the Wealth Tax Act, 1957, the Commissioner of Wealth Tax, Central I, Calcutta, required the Appellate Tribunal to refer the following common questions of law arising out of a consolidated order of the Appellate Tribunal in WTA Nos. 87 and 88(Cal.) of 1989 to this Court for opinion:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in vacating the orders under section 25(2) of the Wealth Tax Act, 1957, passed by the Commissioner of Wealth Tax?
(2) Whether, on the facts and in the circumstances of the ease, the Tribunal was justified in holding that the partners of the firm, M/s. Kanudia Brothers, are entitled to the exemption under section 5(1)(xxxii) of the Wealth Tax Act, 1957, in respect of the flour mill given by the firm on leave and licence basis to M/s. Govardhandas Viswanath, a third party?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in ignoring their own decision on the same issue in the case of the same assessee for the assessment year 1981-82 in disposing of the appeals for the subsequent years relying on the decision of the Andhra Pradesh High. Court in the case of CWT v. C.S. Rao (1988) 174 ITR 612, while the facts of the case have been distinguished?"
The assessment years involved are 1982-83 and 1983-84. The facts, inter alia, are that, on the relevant valuation date, the assessee was a partner of a firm M/s. Kanudia Brothers, which owned Dhanbad Flour Mills, Dhanbad. It is not in dispute that Dhanbad Flour Mills is an industrial undertaking within the meaning of section 5(1)(xxxii) of the Act. The firm M/s. Kanudia Bros. in 1976 gave the above flour mill on leave and licence basis to M/s. Govardhandw Viswanath. The party, M/s. Govardhandas Viswanath, has been running the flour mill since August 1, 1975, and M/s. Kanudia Brothers has been receiving licence fees from the party. The leave and licence to M/s. Govardhandas Viswanath was granted by M/s. Kanudia Brothers initially for a period of three years. But, after expiry of the period of three years, M/s. Govardhandas Viswanath has been running the flour mill till now.
In the Wealth tax assessment, the Assessing Officer allowed an exemption of Rs.1,50,000 and Rs.1,65,000 for the assessment years 1982-83 and 1983-84 under section 5(1)(xxxii) of the Act. On an examination of the assessment records, the Commissioner of Wealth Tax (Central I), Calcutta, was of the opinion that the assessment order was erroneous and prejudicial to the interests of the Revenue. Thus, the Commissioner of Wealth Tax initiated proceedings under section 25(2) of the Act. In the course of hearing of the proceedings under section 25(2) before the Commissioner of Wealth Tax, the assessee, inter alia, submitted that, in view of the decision of the Andhra Pradesh High Court in the case of CWT v. C.S. Rao (1988) 174 ITR 612 (AP), the assessee was entitled to exemption under section 5(1)(xxxii). Thus, the assessment order was not announced. The Commissioner of Wealth Tax considered their submissions and made a distinction on the facts of the present case of the assessee from those of the case before the Andhra Pradesh High Court on the point that, in the case of C.S. Rao (193) 174 ITR 612, the salt pans were leased out temporarily, 'whereas, in the case before him, M/s. Kanudia Bros. gave the flour mills not for a temporary period. The Commissioner of Wealth Tax rather relied on the decision of the Madras High Court in the case of CWT v. PTN Shenbagamoorthy (1983) 144 ITR 724, and on the decision of the Income-tax Appellate Tribunal, `A' Bench, Calcutta, dated October 10, 1988 in W.TAs. Nos. 280 to 282(Cal.) of 1988 in the cases of this very assessee and two other partners on the same issue arising out of the orders of the Commissioner of Wealth Tax under section 25(2) of the Act for the assessment year 1981-82. Thus, the Commissioner of Wealth Tax passed an order under section 25(2) of the Act directing the Assessing Officer to withdraw the exemption under section 5(1)(xxxii) of the Act granted to the assessee earlier erroneously.
The assessee challenged the order of the Commissioner before the Appellate 'Tribunal with reference to the distinction drawn by the learned Commissioner between the decision of the Andhra Pradesh High Court 'and that of the case of the assessee. The attention of the Tribunal was drawn to a written submission dated November 19, 1988, filed before the Commissioner in proceedings under section 25(2) of the Act. It was submitted that the assessee firm had served notice dated January 25, 1985, on M/s. Govardhan Viswanath terminating their leave and licence and asking them to hand over possession of the mill. Reliance was also placed on a copy of the order of the Commissioner of Income-tax (Appeals) dated October 4, 1988 in the case of M/s. Kanudia Brothers wherein income from lease and licence was assessed as "business income" and not as income from "other sources". In view of the above evidence. the Tribunal held that there was no material to 'show that the assessee had stopped permanently the carrying on of the manufacturing or processing of goods and became a defunct firm. ' The Tribunal, therefore, held that the decision of the Andhra Pradesh High Court in the case of C.S. Rao (1988) 174 ITR 612, was clearly applicable to the facts of the case. The Tribunal then considered the order dated October 10, 1988, in the case of the assessee for the assessment year 1981-82 wherein similar relief under section 5(1)(xxxii) was denied to the assessee. The Tribunal pointed out that, when the matter for the assessment year 1981-82 was decided, the decision of the Andhra Pradesh High Court was not available. Thus, a material change in facts had taken place. In view of the decision of the Andhra Pradesh High Court, the Tribunal held that the assessee was entitled to exemption under section 5(1)(xxxii) of the Act and vacated the order of the Commissioner under section 25(2) of the Act. From the above facts, the following comprehensive question in the place of the aforesaid three questions submitted by the Revenue was referred to this Court;
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to claim exemption under section 5(1)(xxxii) of the Wealth Tax Act, 1957, in respect of investment in M/s. Kanudia Brothers and, therefore, the Commissioner was not right in invoking and applying the provisions of section 25(2) of the Wealth Tax Act,1957?"
We have considered the facts on record and the submissions made by the parties- There is no dispute on facts that the firm, M/s. Kanudia Bros. is the owner of Dhanbad Flour Mills which was given on leave and licence basis to M/s. Govardhandas Viswanath for a period of three years with effect from January 1, 1976. Since then the aforesaid concern is running Dhanbad Flour Mills. The assessee, however, claimed that the firm served a notice dated January 21. 1985, on M/s. Govardhandas Viswanath terminating the leave and licence agreement and asked them to hand over possession of the mill to the assessee-firm. Before the Commissioner, the assessee had relied upon the order of the Commissioner of Income-tax (Appeals) dated October 4, 1988, in the case of M/s. Kanudia Bros., wherein it was held that income from leave and licence was to be assessed under the head "Business income" and not "Other sources". In spite of the above order, the Commissioner, in the impugned order, has observed that M/s. Kanudia Bros. did not stop the business of the flour mill on a temporary basis and has, therefore, held that the case before him was distinguishable on the facts from the case of C.S. Rao (1988) 174 ITR 612 (AP). In the case of CWT v. K. Lakshmi (1983) 142 ITR 656 (Mad.), the expression "in the business" in the Explanation to section 5(1)(xxxii) of the Wealth Tax Act, 1957, defining an industrial undertaking is attributable only to generation or distribution of electricity or any other form of power but not to the subsequent clauses referred to in the said Explanation, viz., in the construction of ships-or in the manufacture or processing of goods or in mining. The words "engaged in the manufacture" in the said Explanation postulates the assesee's direct involvement in the manufacture. However, it may not be necessary that the assessee should be personally engaged in the manufacture, but it is sufficient if he employs his own labourers. In a case where the assessee gets the goods manufactured by an outside agency, he cannot be said to manufacture the goods, merely because the for the manufacture or feeds the expenses incurred in the manufacture. In respect of "processing", it will not be correct to state that all the processes resulting in the end-manufacture must be carried out by the assessee himself. Accordingly, if the assessee has done some process which ultimately the end-product such an assessee will be entitled to the benefit of the exemption.
In the case of CWT v. P.T.N. Shenbagamoorthy (1983) 144 ITR 724 (Mad.) one of the assessees who was owning certain salt pans actually manufactured salt and was engaged in the said business while the other hadleased out the salt pans to a third party who was manufacturing the salt. The assessee claims that exemption under section 5(1)(xxxi) of the Wealth Tax Act, 1957, should be granted in respect of the salt pans was accepted by the Tribunal. On a reference, it was held that (1) the production of salt was clearly a manufacturing activity and (2) the activity of manufacture would alone be considered to be an industrial undertaking and not mere ownership of an asset as such, because an undertaking is normally understood as any business or any work or project which one engages in or attempts ass an enterprise analogous to business or trade. Hence, the assessee who actually manufactured salt on his own lands would be eligible for exemption under section 5(1)(xxxi). However, the assessee who owned the salt pans but who had leased out the same to a third party could not be held to be actually engaged in the manufacture of salt and, consequently, could not get exemption under section 5(1)(xxxi). In the case of CWT v C.S. Rao (1988) 174 ITR 612 (AP), looking into the terms of exemption as per clause (xxxi) of Section 5(i) of the Wealth Tax Act, 1957, read with the definition of the term industrial undertaking it is clear that the only requirement is that a firm must own an industrial undertaking which is engaged in the manufacture of processing of goods.
The assessee claimed exemption under section 5(1)(xxxii) for the assessment year 1974-75 in respect of his interest in a firm which owned a rice mill. The Wealth Tax Officer rejected the claim on the ground that no business was carried on by the firm and that it had become defunct in the relevant previous year because it had leased out the rice mill. The Tribunal held that the assessee was entitled to the exemption. On a reference, it was held that the operation of converting paddy into "processing" of goods. Therefore, being an industrial undertaking. There was no finding that the firm had permanently stopped the carrying on of the business. It was not possible to support the inference that the partnership firm ceased to carry on business, or that it became defunct, merely from the fact that it had leased out the Mice mill to outsiders during the previous year. It must be said that, in the previous year relevant to the assessment year 1974-75 and, therefore, on the valuation date corresponding to the assessment year 1974-75, the partnership firm was an "industrial undertaking" engaged in the manufacture or processing of goods so that the exemption under clause (xxxii) of section 5(1) was available to the assessee.
In the case of CIT v. Preen Chand Jute Mills Ltd. (1978) 114 ITR 769 (Cal.) (headnote); the following principles should be borne in mind in determining whether an income is income from business:
"(1) In order to be a business income, there must be evidence of exploitation of a commercial asset;
(2) Exploitation of a commercial asset does not necessarily mean exploitation by the assessee himself at all material times. The assessee may temporarily cause it to be exploited by another person against payment of consideration and for this purpose may execute a lease for a fixed period even with option to renew.
(3) But, in order that the income derived from the lease should be taxable, it must be shown that the lessor's intention was that during the period of the lease, the asset leased out must remain and be treated as a commercial asset and be exploited as such.
(4) This intention of the lessor has to be ascertained from the cumulative effect of all the terms of the lease and other material circumstances."
The assessee-company had been carrying on the business of manufacture of jute goods. It incurred heavy losses due to various factors including quarrels among its directors. It was difficult to work the mills and attempts at settlement were made first through the mediation of the Central Government Investigation and later through the Jute Controller. The company had, in the meanwhile, placed orders for the electrification of its power plant. The company leased out its jute mills for a period of five years with an option to renew it for another five years.
Under the lease agreement, benefits of all quota rights, licences, working time agreement of Indian Jute Mills Association and membership thereof were given to the lessee. The Tribunal held that the income from the lease was business income and also that the assessee was entitled to set off its unabsorbed depreciation and loss against its income. On a reference, it was held that the attempts at settlement and the clause in the lease deed indicated an intention on the part of the assessee to ensure that its asset retained its commercial character, and to exploit it as such, so as to facilitate resumption of the commercial us of the asset by itself. The income from the lease was, therefore, business income assessable under section 28 of the Act of 1961.
If there are two businesses, whether they result in the same business or not, had to be found out by judging whether there is sufficient interlacing or interconnection or dovetailing between the two activities so as to be linked up and considered as the same. But this principle would not apply where income is derived by the exploitation of a commercial asset. Where income is derived by the exploitation of the asset, and there is only a difference in the manner of exploitation, that is to say, instead of user of the asset by the assessee himself there is a leasing out of the asset, the income derived must be considered to be of the same nature, viz., business income. Unabsorbed depreciation and losses incurred when the asset was exploited by the assessee himself can be carried forward and set off against the income derived from leasing out of the commercial asset."
In our opinion, the Tribunal was correct in holding that there is no material on record to show that the assessee has stopped permanently the carrying on of the manufacturing or processing of goods and has become a defunct firm. In fact, on the facts, the Tribunal came to the conclusion that it cannot be said that the assessee ceased carrying on the business of flour mills and the decision in the case of C.S. Rao (1988) 174 ITR 612 (AP), is applicable to the facts of the case.
Section 5(1)(xxxii) of the Wealth Tax Act provides as follows:
"5(1). Subject to the provisions of subsection (1-A), wealth tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee--
(xxxii) the value, as determined in the prescribed manner of the interest of the assessee in the assets (not being any land or building or any rights in any land or building or any asset referred to in any other clause of this subsection) forming part of an industrial undertaking belonging to a firm or an association of persons of which the assessee is a partner or, as the case may be, a member."
It is clear from the aforesaid provision in the statute that, for claiming 1 exemption under this section, the primary condition to be satisfied is that the assets of the industrial undertaking must be "belonging" to a firm or an association of persons of which the assessee is a partner. It cannot be said that the firm, M/s. Kanudia Bros., had no industrial undertaking "belonging" to it and that the industrial undertaking was not owned by it and the same belonged to the partnership firm of M/s. Kanudia Bros. This will be evident from the fact that the assets of the said industrial undertaking did appear in the balance-sheet of the aforesaid partnership firm. The ownership, therefore, vested in the partnership firm itself and such ownership was not transferred to the transferee licensee from whom licence fee was received by the partnership firm. This will be evident from the agreement entered into with the said partnership firm. The said agreement, inter alia, provided the following:
(a) The licensee was under an obligation to maintain the mill in working condition.
(b) Liability for payment of municipal taxes was on M/s. Kanudia Bros.
(c) No changes in permanent structure to be made by the licensee without permission from M/s. Kanudia Bros.
(d) The licensee should see that the value of the assets does not diminish.
(e)Right to enter the premises and inspect plant and machinery to the licensor.
(f) M/s. Kanudia Bros. was entitled to keep a miller, electrician and Chowkidar at the mill premises.
These aforesaid rights mentioned in the agreement go with the right of the partnership and do not go with the right of the licensee. Further, if the ownership had vested in the licensee, there was no need for the licensee to pay any licence fees to M/s. Kanudia Bros. which has been assessed in its hands and it will be apparent on going through the assessment order of M/s. Kanudia Bros. for the assessment years 1982-83 and 1983-84. From the said orders, it would be further found that, while assessing the income from the licensee under the head "Other sources", it was allowed depreciation on the assets of the industrial undertaking.
In our opinion, there is no reason to deny the benefit of the exemption to the assessee and the Tribunal was justified in vacating the order of the Commissioner under section 25(2) of the Act and allowing the appeal of the assessee.
Under such circumstances, we are not inclined to interfere in the decision of the Tribunal.
The question, therefore, is answered in the affirmative and in favour of the assessee.
There will be no order as to costs.
AJIT K. SENGUPTA, J: --I agree.
M.B.A./2035/TQuestion answered.