COMMISSIONER OF INCOME-TAX VS VEERABHADRA INDUSTRIES
2001 P T D 2795
[240 I T R 5]
[Andhra Pradesh High Court (India)]
Before Ms. S. V. Maruthi and S. Ananda Reddy, JJ
COMMISSIONER OF INCOME‑TAX
verses
VEERABHADRA INDUSTRIES
Case Referred No.233 of 1990, decided on 15/06/1999.
Income‑tax‑‑‑
‑‑‑‑Firm‑‑‑Business‑‑‑Property‑‑‑Registration of firm‑‑‑Essential requirement for a firm is that 'it should carry on business‑‑‑Single act of constructing godown and letting it out does not constitute business‑‑‑Income from such letting out is assessable as income from property‑‑‑Firm was not entitled to registration‑‑‑Indian Income Tax Act, 1961, Ss.22, 28 & 185‑‑‑[Nauharachand Chananram v. CIT (1971) 82 ITR 189 (P & H) and Prem Trading Co. v. CIT (1987) 166 ITR 211 (MP) dissented from].
Godowns constructed by the assessee had been let out and the rental income had been shown as business income. The Income‑tax Officer assessed the rental income under the head "Business" after allowing deductions claimed by the assessee for the assessment years 1979‑80 and 1980‑81. He also granted registration for the two assessment years. The Commissioner of Income‑tax initiated proceedings under section 263 of the Income Tax Act, 1961, and cancelled the registration. The Tribunal, however, held that the assessee was entitled to registration. On a reference.
Held, that a single act of constructing a godown and letting it out cannot be treated as a business. The expression "business" contemplates continuous activity from year to year. There was no evidence that the assessee was continuing the activity of constructing godowns and letting them out from year to year. There was no material that it had constructed a godown in the relevant year. Therefore, the income from a simple letting out of the godown could not be treated as business income for the purpose of the Income‑tax Act. When once it was not business income the question of availing of benefit under section 185(1)(a) would not arise. The firm was not entitled to registration. The income had to be assessed as income from property.
CIT v. Phabiomal & Sons (1986) 158 ITR 773 (AP) fol.
Nauharachand Chananram v. CIT (1971) 82 ITR 189 (P & H) and Prem Trading Co. v. CIT (1987) 166 ITR 211 (MP) dissented from.
CIT v. Lakshmi Company (1982) 133 ITR 904 (Mad.) and CIT v. Shan Finance (P.) Ltd. (1998) 231 ITR 308 (SC) distinguished.
CIT v. Vinod Bhargava (1988) 169 ITR 549 (AP) ref.
S.R. Ashok for the Commissioner.
Nemo for the Assessee.
JUDGMENT
MS. S.V. MARUTHI, J.‑‑‑The Income‑tax Appellate Tribunal referred the following question under section 256(1) of the Income Tax Act, 1961, for the opinion of this Court at the instance of the Revenue:
'Whether, on the facts and in the circumstances of the case, the Income‑tax Appellate Tribunal is justified in holding that the assessee‑firm is entitled to the benefit of registration under the Income‑tax Act, notwithstanding that the main activity of the assessee was letting out of godowns constructed by it and receiving rental income therefrom, for the assessment years 1979‑80 and 1980‑81?"
The facts in brief are that the godowns were constructed by the assessee have been let out to Aries Agro Vet Industries (P.) Ltd., the rental income from the godowns has been shown as business income and deductions like depreciation and miscellaneous expenses are claimed. The Income‑tax Officer assessed the rental income under the head "business" after allowing deductions claim by the assessee for the assessment years 1979‑80 and 1980‑81. He also granted registration for the two assessment years. The Commissioner of Income‑tax initiated proceedings under section 263 of the Income‑tax Act, after considering the submissions of the assessee, he cancelled the registration granted by the Income‑tax Officer under section 185(1) of the Act. He directed the Income‑tax Officer to re-compute the income from letting out of the godown as income from the property in accordance with sections 22 to 27 of the Act. Against that the assessee filed appeal. The Tribunal held that the rent received from letting out of the godown was income from property, however, it held that letting out of the godowns can be considered as business for the purpose of partnership and on this issue, the assessee is entitled for continuation of registration, in other words, notwithstanding the fact of the income of the assessee, the assessee is still entitled for registration under section 185(1)(a) of the Act. At the instance of the Revenue, the question extracted in the earlier paragraph was referred for the opinion of this Court.
The main argument of learned counsel for the Revenue is that this Court in CIT v. Phabiomal & Sons (1986) 158 ITR 773, has held that letting out of the building and realising the rents therefrom did not amount to carrying on of business and it was incidental to the ownership. In view of the judgment of this Court, the order of the Tribunal having held that the income is to be taxed as income from property, ought not to hale held that the assessee is entitled for registration under section 185(1)(a) of the Act.
The assessee contended that he has entered into partnership for the purpose of carrying on construction and letting out the godowns, and therefore, its income is income from business and when once it is income from business, it is entitled for registration under section 185(1)(a) of the Act. In support of his contention he relied upon the following decisions:
Nauharchand Chananram v. CIT (1971) 82 ITR 189 (P & H); CIT v. Vinod Bhargava (1988) 169 ITR 549; (AP) Prem Trading Co. v. CIT (1987) 166 ITR 211 (MP); and CIT v. Shaan Finance (P.) Ltd. (1998) 231 ITR 308 (SC).
He vehemently contended that income from letting out of the godowns is business income, and therefore, they are entitled for registration under section 185(1)(a) of the Act. It is difficult to accept the contention of learned counsel for the assessee because a single act of constructing a godown and letting it out cannot be treated as a business. The expression "business" contemplates continuous activity from year to year. There is no evidence that the assessee is continuing the activity of constructing godowns anal letting them out from year to year. There is no material that he has constructed a godown in this year. Therefore, the income from a simple letting out of the. godown cannot be treated as business income for the purpose of the Income‑tax Act. When once it is not business income the question of availing of benefit under section 185(1)(a) of the Act does not arise. The Income has to be assessed as income from property in accordance with sections 22 to 27 of the Income‑tax Act. We are fortified in our view by a judgment of this Court in Phabiomal & Sons' case (1986) 158 ITR 773, wherein it was held that letting out a building and realising rents therefrom did not amount to carrying on of business. It is true that the Punjab and Haryana High Court in Nauharchand Chananram's case (1971) 82 ITR 189, took the view that letting out of a factory amounts to carrying on business. With respect we disagree with the view expressed by the Punjab and Haryana High Court. The judgment in Lakshmi Company's case (1982) 133 ITR 904 (Mad.), is distinguishable from the facts of the case. It is a case where the assessee went on putting up additional constructions and letting it out to various tenants which was in the nature of business activity, because, as pointed out in the earlier paragraph, it is a case where there is continuous activity and, therefore, that judgment is distinguishable on facts.
The judgment of the Madhya Pradesh High Court in Prem Trading Co.'s case (1987) 166 ITR 211, is also similar to the judgment of the Punjab and Haryana High Court in Nauharchand Chananram's case (1971) 82 ITR 189. The judgment of this Court in Vinod Bhargava's case (1988) 169 ITR 549 is a case where the assessee continued his building activity and had not leased out the entire building but only leased out the plant and machinery. Therefore, it was held that the assessee is entitled to the benefit under section 33 of the Act. The said judgment was confirmed by the Supreme Court.
The judgment in First Leasing Co. of India Ltd.'s case (1998) 231 ITR 308 (SC) is also distinguishable on the facts. This is case where the assessee claimed investment allowance under section 32A of the Act. The scope and interpretation of section 32A is settled and it was held that the assessee would be entitled for investment allowance under section 32A of the Act. The scope of the judgment is entirely different and it has no application to the facts of this case.
In view of the above, we answer the question referred by the Tribunal in the negative and in favour of the Revenue. Reference is answered accordingly.
M.B.A./284/FCReference answered.