COMMISSIONER OF INCOME-TAX VS MODI INDUSTRIES LTD., 1995 PTD-DELHI-HIGH-COURT-INDIA 920 (1995)

1995 P T D 920

[210 I T R 1]

[Delhi High Court (India)]

Before D.P. Wadhwa, P.K Bahri and D.K Jain, JJ

COMMISSIONER OF INCOME-TAX

Versus

MODI INDUSTRIES LTD.

Income-tax Reference Nos.67 and 70 of 1982, decided 18th April, 1994.

Income-tax---

----Income from business or income from house property---Property or portion occupied by assessee for purpose of business---"Occupy", meaning of---Property originally occupied by employees/directors of assessee-company-- Continuing to- be occupied by them as nominees of managing agents---Finding that assessee found it expedient to allow their occupation. to facilitate proper supervision of assessee's business---Income to be computed as income from business---Actual expenses towards repairs and depreciation allowable- --IndianIncome Tax Act, 1961, Ss.14 & 22.

A bungalow owned by the assessee-company was in the occupation of G and K since 1932 as employees and directors free of charge. In July, 1960, after managing agents were appointed for. the company, G and K were permitted to continue the user of the bungalow but as nominee directors of the managing agents on payment of nominal rent. The assessee-company effected repairs to the bungalow and also provided modern amenities including air conditioners. The questions were whether the income from the bungalow was to be computed as income from business and whether the assessee was entitled to claim allowance for actual repairs and depreciation. The Appellate Tribunal found that the assessee-company found it expedient to allow the benefit of occupation of the property by nominees of the managing agents in order to facilitate proper supervision by them in the interests of smooth running of the business of the assessee and held that the income from the bungalow had to be computed under the head "Income from business" and not under the head "Income from house property" and also that the assessee was entitled to deduction of the actual repairs and depreciation. On a reference:

Held, (i) that, in view of the finding of fact by the Tribunal, occupation of the property by G and K for the purpose of effective discharge of their duties vis-a-vis the business of the assessee-company amounted to occupation by the assessee for the purpose of its business and the income, therefore, had to be assessed as income from business.

(ii) that the assessee was entitled to deduction of actual repairs and depreciation.

The term "occupy" appearing in section 22 of the Income Tax Act, 1961, refers to occupation directly by the assessee or through an employee or an agent but such occupation by the employee, etc. must be subservient to and necessary for the performance of the duties in connection with the business of the assessee.

To fail within the ambit of the exemption in section 22 it is not necessary that the property must be as such in the occupation of the assessee himself or necessarily used for carrying on his business activity and not used for residential purposes.

When a house property is occupied as residence by employees or directors, etc. of the assessee-company, if concerned with the promotion of the business of the assessee-company, whether on payment of rent or otherwise, to enable them to discharge their functions efficiently and the letting out of the property is subservient and incidental to the main business of the assessee, such an occupation amounts to occupation and user of the property by the assessee itself for the purpose of its business, even though no business is actually run in such premises.

CIT v. Delhi Cloth and General Mills Co. Ltd. (1966) 59 ITR 152 (Delhi); New Bank of India Ltd. v. CIT (1983) 140 ITR 132 (Delhi) and CIT v. Vazir Sultan Tobacco Co. Ltd. (1988) 173 ITR 290 (AP) fol.

East India Housing and Land Development Trust Ltd. v. CIT (1961) 42 ITR 49 (SC) and P.V.G. Raju v. CIT (1967) 66 ITR 122 (AP) distinguished.

Jamshedpur Engineering and Machine Manufacturing Co. Ltd. v. CIT (1957) 32 ITR 41 (Pat.) ref.

B. Gupta Rajendra, D.N. Malhotra and D.C. Taneja, Advocates for the Commissioners.

G.C. Sharma, Senior Advocate (Anoop Sharma and Deepak Chopra, Advocates with him) for the Assessee.

JUDGMENT

D.K. JAIN, J.---In these two references, at the instance of the Revenue, on a direction issued by the Allahabad High Court under section 256(2) of the Income Tax Act, 1961 (in short, "the Act"), the Income Tax Appellate Tribunal (in short, "the Tribunal), has referred the following questions of law in respect of the assessment years 1963-64 to 1965-66 (Income-tax Reference No.67 of 1982) and assessment year 1967-68 (Income tax Reference No.70 of 1982):

"(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income from Modi Bhawan should be assessed under the head `Business' and not under the head `House property'?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that deduction for actual repairs and depreciation in respect in Modi Bhawan are deductible as business expenses?"

Income-tax Reference No.70 of 1982:

"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in directing that depreciation be allowed on a sum of Rs.1,09,876 spent on Modi Bhawan?"

Since the questions referred to us in both the references are materially identical, we intend to dispose of both the references by this common judgment.

The Division Bench before which the case originally came up for hearing was of the view that: (1) the issue raised should be considered by a Full Bench as it was felt that in the decision of this Court in New Bank of India Ltd. v. CIT (1983) 140 TR 132, some aspects, viz., the Supreme Court's decisions in East India Housing and Land Development Trust Ltd. v. CIT (1961) 42 ITR 49 and the Andhra Pradesh High Court's decision in P.V.G. Raju v. CIT (1967) 66 ITR 122 had not been considered; (2) while interpreting sections 22 and 23 of the Act, the provisions of section 38 had to be kept in mind which was not done; (3) the Revenue's counsel's contention regarding non-applicability of the exception in section 22 had not been dealt with; and (4) there were a large number of important points which required a more detailed consideration. That is how the matter has come up before us.

The material facts, as found by the Tribunal, are that the assessee, a public limited company, owned a bungalow known as Modi Bhawan. The said Bungalow was in the occupation of R.B. Gujar Mal Modi and Shri K.N. Modi since 1932 as employees and directors of the assessee-company free of charge. It appears that subsequently Messrs R.B. Multani Mal & Sons (P.) Ltd. were appointed as the. managing agents of the assessee-company. On July 22, 1960, the shareholders of the assessee-company passed a resolution whereby R.B. Gujar Mal Modi and K.N. Modi were permitted to continue the user of Modi Bhawan as their residence but now as nominee directors of the said managing agents and on payment of a rent of Rs.200 per annum. Thus, the bungalow remained in their occupation all through except that instead of occupying it as directors and employees of the assessee, they were allowed to occupy it from July 22, 1960, as nominees of R.B. Multani Mal & Sons (P.) Ltd. the managing agents of the assessee-company, on payment of a nominal rent. The assessee- company claimed depreciation as also certain amounts incurred on repairs of the said premises in the relevant previous years, on the plea that the said building is a business asset and is being used for its business purposes. While framing assessments for the relevant assessment years, the Income Tax Officer felt that the charging of the nominal rent of Rs. 200 per annum from the said two directors by the assessee was only with a view to comply with certain provisions of the Companies Act and the real rental of the property was much higher. While pointing out that substantial amounts had been spent by the assessee for the repairs of the building and in providing modern amenities, including air-conditioners, etc., the Income Tax Officer estimated the annual letting value of the said property and brought it to tax under the head "Income from house property". He also disallowed the expenses claimed by the assessee on repairs as well as depreciation on the property but allowed the statutory deduction under section 24 of the Act for repairs. In appeal by the assessee, the Appellate Assistant Commissioner came to the conclusion that the premises had been occupied by R.B. Gujar Mal Modi and K.N. Modi previously as employees of and for the purposes of the assessee-company's business which was also clear from the fact that the assessee had throughout treated this property as its business asset and that the Income Tax Officer had not only allowed depreciation but also repairs carried out to the building. The Appellate Assistant Commissioner found no difference in the situation simply because the property had been given over to the managing agents. According to him, this did not change the purpose for which the house had been built and that it remained in physical possession of the same person who were managing the affairs of the assessee-company earlier as its employees and later on behalf of the managing agents of the assessee-company. The Appellate Assistant Commissioner, therefore, held that the said property should be treated as the business asset of the assessee-company and its income should be assessed under the head "Profits and gains of business or profession" and not under the head "Income from house property". Aggrieved, the Revenue preferred an appeal to the Tribunal but the appeal was unsuccessful. The Tribunal came to the conclusion that the income from Modi Bhawan was income from business and in that view of the matter, it allowed the expenses claimed by the assessee for repairs as also the depreciation. It is this conclusion of the Tribunal which is in challenge before us.

Mr. B. Gupta, learned counsel for the Revenue, has contended that: (i) various heads of income, classified under section 14 of the Act, being distinct and mutually exclusive, the income derived from a distinct source falling under a specific head is to be computed under the appropriate section irrespective of its user or purpose of letting and, therefore, the income from Modi Bhawan has to be computed as income from house property even though the said property is held to be a business asset; (ii) the property is in the occupation of the representatives (nominee directors) of Messrs R.B. Multani Mal & Sons (P.) Ltd. the managing agents of the assessee-company, which is a distinct entity with an independent business income and, therefore, occupation and user of the said property by the said nominees of the managing agents cannot be equated with occupation and user of the property by the assessee for the purpose of its business; and (iii) the property is used for residential purposes and, therefore, it cannot be taken to be used for business purposes of the assessee so as to entitle it to claim exemption from chargeability to tax under section 22 of the Act. For his first proposition, Mr. Gupta has relied upon a decision of the Andhra Pradesh High Court in P.V.G. Raju's case (1967) 66 ITR 122. On the other hand, Mr. G.C. Sharma, senior counsel for the assessee, in seeking to support the view taken by the Tribunal, has submitted that in view of the two decisions of this Court in CIT v. Delhi Cloth and General Mills Co. Ltd. (1966) 59 ITR 152 and New Bank of India's case (1983) 140 ITR 132 (Delhi), no fault can be found with the order of the Tribunal.

To appreciate the rival contentions, it is necessary to analyse the relevant provisions of the Act. Chapter IV of the Act contains various provisions for computation of total income under different heads, classified under section 14. One of the heads, so enumerated, is "Income from house property". Sections 22 to 27 deal with the income from house property. Section 22, which subjects to tax the income from house property, reads as follows:--

"22. The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head `income from the house property':"

From a plain reading of section 22, it is clear that the annual value of the property, consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, is chargeable to income-tax under the head "Income from house property" except such portions of such property which the assessee may occupy for the purposes of any business or profession carried on by him, profits whereof are chargeable to income-tax. In other words, when an owner occupies the whole or any portion of house property for the purposes of his business carried on by him, the profits of which are chargeable to income-tax, the annual-value of the whole or that portion of the property, as the case may be, will not be chargeable to tax under the head "Income from house property". The exception in section 22 itself takes the bottom out of the first contention of Mr. Gupta that income from property must necessarily be computed under that particular head alone and no other.

In order to claim exemption in respect of the income from house property under section 22, the assessee must satisfy two conditions, viz. (2) the property or portion thereof must be occupied by the assessee for the purposes of his business or profession; and (2) the profits and such business should be chargeable to income-tax. There is no dispute that profits of the assessee company, which is stated to be, "occupying" the property are charged to income-tax. To attract the exemption under section 22, it has to be seen whether the property is occupied for the purposes of any business of the assessee-company. The property, since July, 1960, has been in the occupation of the functionaries of the managing agents and not directly of the owner assessee-company and the point falling for consideration is whether to avail of the exemption under section 22 of the Act, the property must necessarily be: (i) in direct occupation of the assessee-company, and (ii) used as such for transaction of the assessee's business or profession. This would depend on the scope of the term "occupy".

The term "occupy" appearing in section 22 has been judicially interpreted, as would be noticed hereafter, as occupation directly by the assessee himself or through an employee or agent but such occupation by the employees, etc. within the meaning of the exception in the said section, must be subservient to and necessary for the performance of the duties in connection with the business of the company.

The material question to which we have, therefore, to address ourselves is whether the occupation of Modi Bhawan by the nominee directors of its managing agents, for their residence on payment of rent can, in the facts and circumstances of the case, be deemed as occupation of the property by the assessee for the purposes of its business, profits whereof are assessable to tax, so as to entitle the assessee to exclude the income from its property under section 22 of the Act.

In CIT v. Delhi Cloth and General Mills Co. Ltd. (1966) 59 ITR 152 (Delhi), the assessee-company which carried on a number of business, engaged a large number of employees. The company let out quarters to its employees in the vicinity of the mills. The rental of these premises was fixed and it was deducted from the wages of the employees concerned. A question arose whether the income to the assessee from the quarters rented out to its employees was income from business and fell for assessment under section 10 (profits and gains of business, profession or vocation) of the Indian Income Tax Act, 1922, and not under section 9 (income from property) of the said Act. The Circuit Bench of the Punjab High Court at Delhi observed that, in each case, where there is a conflict as to whether income from property has to be assessed under section 9 or section 10, what has to be determined is whether such income does or does not arise from property occupied by the assessee for purposes of his business. The question is essentially a question of fact and what has to be discovered is whether the occupation of the property by its employees is subservient to the main business of the assessee. The point for decision was: is the provision of residential quarters to its employees a part of the business of the company? The Bench pointed out that the employees in that case werq engaged in the main business of the company and their residence in the building in question was incidental to their main occupation, namely, the carrying on of the business of the company : the residential accommodation was provided to them not because the company was trying to earn or was engaged in the business of earning rental income from the employees but for the purpose that the employees carry on efficiently the business of the company and the housing accommodation was an amenity which was provided for the purpose of the business of the company and was not de hors the business. The Court accordingly held that income from the said property was to be assessed under section 10 of the said Act. The Bench also held that the word "occupy" could not be given a restricted meaning and in the context of sections 9 and 10 of the said Act, the occupation of a tenant should be treated as occupation of the owner and, therefore, legally the property would be in the occupation of the owner though not in its physical occupation. In taking this view, the Court sought to derive support from a decision of the Patna High Court in Jamshedpur Engineering and Machine Manufacturing Co. Ltd. v. CIT (1957) 32 ITR 41, holding that letting of the property for residence by the assessee-company to its employees being subservient to the main business of the company, their occupation is to be taken as of the assessee.

In New Bank of India Ltd. v. CIT (1983) 140 ITR 132 (Delhi), the said bank originally had its head office at Lahore but at the time of partition of the country in 1947, it was shifted to Delhi. The staff at Lahore was transferred and came over to India and the bank considered it necessary that it should make arrangements for the proper residential accommodation for those employees who had been driven away from their homes in Lahore. With the object of providing residential accommodation to its employees in the tragic circumstances surrounding the partition of the country, the bank purchased a property in Delhi soon after the partition of the country. Between 1947 and July 1955, when the building was sold, it was occupied by the employees of the assessee-Bank. The Bank employees who occupied the premises were charged rent at the rate of ten per cent. of their salary. On the sale of the said premises, the assessee made a claim under section 10(2)(vii) (profits chargeable to tax on sale, etc. of a business asset) of the said Act. The question that arose for consideration was whether the property acquired by the Bank to utilise it for accommodating its employees, on payment of rent, could be said to be property, which was occupied or used by the assessee-Bank for the purposes of its business. A Division Bench of this Court pointed out that the assessee-Bank was forced to purchase this property in somewhat special circumstances. It was a consequence of migration forced on the Bank and its employees at the time of partition of the country that necessitated the purchase. They further pointed out that although the Bank did not occupy the premises for running its business, in the extraordinary situation following the partition, the Bank considered it necessary that its employees who had had to flee their homes in Pakistan should be provided with residential accommodation in order to enable them to function efficiently for the purposes of the business of the assessee Bank. The Bench, thus, observed that the purchase of the property and its allotment to the employees were made not with a view to derive the rental income from the property but on grounds of commercial expediency for carrying on the business of the Bank more efficiently, and fruitfully and accordingly held that the property was a capital asset and, therefore, the assessee's claim under section 10(2)(vii) of the said Act should be accepted. While holding so, the Court followed the decision in Delhi Cloth and General Mills Co. Ltd.'s case (1966) 59 ITR 152 (Delhi).

Expressing a similar view in CIT v. Vazir Sultan Tobacco Co. Ltd. (1988) 173 ITR 290, the Andhra Pradesh High Court pointed out that the idea of providing accommodation to the employees is that they should be near the factory or should be housed in hygienic or proper conditions so as to improve their productivity, health and their commitment to the employer and in such a case the purpose of allotment will undoubtedly be business purpose, for it ultimately goes to promote the assessee's business. Drawing a similarity of purpose for provision of accommodation to a worker and a senior executive, the Court held that occupation of the company's houses by its employees, whether they are workers or directors, is for the business purpose of the assessee-company and income from such property could not, therefore, be treated as income from house property.

From the aforesaid decisions it would appear that the consistent view of the Courts has been that when a house property is occupied as residence by the employees or its directors, etc. if concerned with the promotion of the business of the assessee-company, whether on payment of rent or otherwise to enable them to discharge their functions efficiently and the letting out of the property is subservient and incidental to the main business of the assessee, such an occupation amounts to an occupation and user of the property by the assessee himself for the purposes of his business, even though no business is actually run in such premises. The above-noted three cases, relied upon by the assessee, hold that to fall within the ambit of the exemption in section 22, it is not necessary that the property must be as such in the occupation of the assessee-company itself or necessarily used for carrying on its business activity and not used for residential purposes. We respectfully agree with the proposition of law laid down therein. This disposes of the third leg of arguments of the Revenue's learned counsel, Mr. Gupta, that property used for residential purposes cannot be taken to be used for business purposes. What is important is that it is put to use for the benefit of the assessee to run its business management and activity efficiently to improve its profitability, which is charged to tax as such. In all the three cases, properties were used for residential purposes of its employees/workers/directors. Herein, the property is occupied as a residence for persons comparatively much higher in status, who are not employees of the assessee-company but nominee directors of the assessee's managing agents, Messrs R.B. Multani Mal & Sons (P.) Ltd. which company is distinct from the assessee-company, and the contention of the Revenue is that the analogy of occupation of a worker-employee cannot be stretched to affluent persons like nominee directors of another company only having managing agency charge.

At first blush, the argument appears to be attractive but does not survive on closer scrutiny. It is true that the status in life of persons in occupation of the property, who as such are not employees of the assessee- company and the posh premises in their occupation bear no comparison with the humble quarters provided for living by the assessee-company to its workers or employees in the three cases, but what is relevant, and indeed the pith and substance of the matter, is the purpose for which the property is given for their occupation. It has to be seen whether letting to and occupation of the building by them is subservient and incidental to the business of the company or a matter of commercial expediency or merely for their enjoyment, which are matters of fact in each case. Their status has no relevance, nor is the rental charge, i.e. Rs.200 per annum tenuous or even ridiculous considering the property and amenities provided. In fact, renting at this paltry sum would show that the purpose of letting was not to earn rental income and this distinguishes the present case from the facts and findings of P.V.G. Raju's case (1967) 66 ITR 122 (AP).

As noted above, R.B. Gujar Mal Modi and K.N. Modi were in occupation of the house property in question since 1932 as employees/directors of the assessee=company and till 1960, the said property was treated as a business asset of the assessee-company. It was only in 1960 that their occupation assumed the character of nominee directors of the managing agents of the assessee-company. The stand of the Revenue in the second leg of the arguments of Mr. Gupta is that this change takes the chargeability of the property income out of the exception carved out in section 22 of the Act inasmuch as the occupation of the managing agent could not be equated with the occupation of the assessee-company within the meaning of the said section. We do not feel persuaded to agree. Occupation of the property by the assessee-company's managing agents (appointed for running the business of the assessee-company) or the latter's nominees, as found by the Tribunal, is for and on behalf of the assessee-company. The finding of fact recorded by the Tribunal to the effect that the assessee-company found it expedient to allow the benefit of the occupation of the property by nominees of the managing agents in order to facilitate proper supervision by them in the interest of smooth running of the assessee-company's business virtually makes it so. One may feel otherwise but this concurrent finding of fact recorded by the Appellate Assistant Commissioner and upheld by the Tribunal has not been assailed before us and, therefore, we cannot review it. In that view of the matter, we find no distinction in the occupation of the assessee- company's property by an employee or its director or its managing agent or the latter's nominees. Occupation of the property by them for the purpose of effectual discharge of their duties vis-a-vis the business of the company, in our view, is tantamount to occupation by the assessee-company for the purposes of its business.

Applying the ratio of the said decisions on the facts found by the Tribunal in the instant case, we are of the view that the answers to the questions proposed have to be. in favour of the assessee.

Adverting to the points raised by, the Division Bench, it is true that East India Housing and Land Development Trust Ltd.'s case (1961) 42 ITR 49 (SC) and P.V.G. Raju's case (1967) 66 ITR 122 (AP) are not referred to in the decisions rendered in Delhi Cloth and General Mills Co. Ltd.'s case (1966) 59 ITR 152 (Delhi) and New Bank of India's case (1983) 140 ITR 132 (Delhi). The ratio decidendi of these decisions is that the distinct head specified in section 14 of the Act indicating the sources are mutually exclusive and income derived from different sources falling under specific heads has to be computed for the purpose of taxation in the manner provided by the appropriate section. There is no quarrel with the proposition of law laid therein. But the same had no application to either Delhi Cloth and General Mills Co. Ltd.'s case (1966) 59 ITR 152 (Delhi) or New Bank of India's case (1983) 140 ITR 132 (Delhi), relied upon by the assessee. The ratio of East India Housing and Land Development Trust's case (1961) 42 ITR 49 (SC) and P.V.G. Raju's case (1967) 66 ITR 122 (AP) is not applicable to the facts of the present case also. If an assessee succeeds in showing that his case is covered by the exception in section 22, the income from the house property must necessarily go out of the substantive charging provision of section 22 of the Act.

As regards the other doubt expressed by the Division Bench that if it is held that when houses are given to its employees, section 22 will never apply as the house will be regarded as having been given for the purpose of business and in the process section 38(1) of the Act, providing -for proportionate deductions m respect of buildings, etc. partly used for business, etc., or not exclusively so used, will also never apply in the case of a company, although the point has not been argued before us, we would clarify that we are not laying down an abstract proposition of law that whenever a house property is let out by a company to its employees or directors, as the case may be, it must always be taken to have been occupied by the company- for the purposes of its business. The question whether the property has been occupied by the assessee for the purpose of business or not would essentially depend on the facts of each case. In other words, it will have to be determined whether the occupation of the assessee-company's property by its employees is with a view to enable them to function more efficiently for the purpose of the assessee's business. In the absence of a clear finding to that effect, it would only be an enjoyment of the company's asset for personal purposes and as such section 38 may be attracted. Even otherwise, we feel that sections 22 and 38 of the Act deal with different matters and situations and do not appear to be dependent on each other. We do not think that while interpreting section 22, the provisions of section 38 must be adverted to or dealt with.

No other point has been urged before us.

In view of the foregoing discussion, we endorse the view taken by the Tribunal that the income from "Modi Bhawan" should be assessed under the head "Profits and gains of business" and not under the head "Income from house property" and, consequently, the assessee would be entitled to deduction for the actual amount spent by it on repairs of the said building as also the depreciation while computing its income under the head "profits and gains of business". Accordingly, we answer the question in both the references in the affirmative, in favour of the assessee and against the Revenue.

There will be no order as to costs.

M.BA./806/FT Order accordingly.