Messrs SATTER FLOUR MILLS PRIVATE LTD., SUKKUR VS DEPUTY COMMISSONER OF INCOME-TAX, 2004 PTD-KARACHI-HIGH-COURT-SINDH 735 (2003)

Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Ss. 22 & 30‑‑‑Income from lease of Flour Mills‑‑‑Assessing Officer assessed such income as income from other sources under S.30(2(d) of Income Tax Ordinance, 1979‑‑‑Appellate Authority took the view that such income was to be assessed as business income under S.22 of the Ordinance‑‑‑Tribunal upheld the order‑in‑original‑‑‑Plea of assessees was that although Mills were leased out, assessee continued to use wheat quotas, telephones, employed Chowkidars and pay taxes of Mills like property tax etc.‑‑‑Validity‑‑‑Letting of building was inseparable from letting of plants, machineries, godowns, machinery rooms of Flour Mills‑‑‑Such plea was of no relevance to controversy involved‑‑‑High Court dismissed the appeal.

Sultan Brothers Private Ltd. v. Commissioner of Income‑tax, Bombay City‑II (1964) 51 ITR 353 rel.

Javed Zakaria for Appellants.

Muhammad Arif Moten for Respondents.

Date of hearing: 25th September,' 2003.

JUDGMENT

GULZAR AHMED, J.‑‑‑In these two appeals the question of law that needs to be considered is:

Whether in the facts and circumstances of the case the learned Income Tax Tribunal was right in holding that the income from lease of entire mill including plant, machinery and factory building and land, godown, machinery room was to be computed under the head `income from other source' and not from `income from business'?

The brief facts of the matter are that the appellants are private limited companies which were incorporated with the object of doing the business of manufacturing flour and its products and in this respect to establish a flour mills. From the assessment year 1994‑95 the appellant in Appeal No.85 of 2000 and from assessment year 1995‑96 the appellant in Appeal No.779 of 2000 leased out the flour mills including lands, factory buildings, machine rooms, plants and machineries and other equipments and electric appliances. For the said assessment years 1994‑95 and 1995‑96 the appellants respectively filed returns of income under section 22 of Income Tax Ordinance, 1979 (to be called the Ordinance) as income from business and such returns were accepted by the Assessing Officer. In respect of the assessment year 1997‑98, the Assessing Officer, however, changed his mind and instead of treating the appellants' income under section 22 of the Ordinance as income from business assessed the same under section 30 of the Ordinance as income from other sources. The appellants challenged the assessment order by filing appeal before the Appellate Additional Commissioner of Income Tax (CIT) who took the view that the appellants' income was to be assessed under section 22 as business income. The Department went in appeal before the Income-Tax Appellate (the Tribunal) while the appeals were pending in the Tribunal for the assessment year 1997‑98, the Assessing Officer further finalized assessment orders for the year 1998‑99 as income from other sources which assessment orders were also challenged before. CIT who again passed orders of assessment as income from business. These orders of the CIT. were also appealed against in the Tribunal. The Tribunal passed orders for assessment year 1997‑98 by which the CIT orders were set aside and orders of Assessing Officer were maintained. For the assessment year 1998‑99 the Tribunal also set aside the orders of CIT and restored that of the Assessing Officer. In these appeals the Tribunal orders for the assessment year 1998‑99 are impugned.

Learned counsel for the appellants has contended that the appellants have established the flour mills for doing of its own business and in fact has done the business for some time but due to market conditions, the appellants had to give the flour mills on lease. He contended that although the mills were leased, the appellant, continued to use wheat quotas, telephones, employed Chowkidars and also pay all taxes of the mills like property tax, betterment tax. He stated that the appellants continued to do their business and therefore, income were assessable under section 22 of the Ordinance‑ as income from business. The appellants counsel stated that authorities .on which he relies are mentioned in the Memo. of Appeals. On the other hand, Mr. M. Arif Moten, learned counsel appearing for the respondent supported the impugned order and stated that by virtue of specific provision in section 30(2)(d) of the Ordinance the appellant income was rightly assessed as income from other sources and the impugned orders are in accordance with law.

We have considered the arguments of the learned counsel and have gone through the record.

The relevant provisions of section 22 and section 30 of the Ordinance which are germane to the issue are reproduced as follows:‑‑

"22. Income from business or profession.‑‑‑The following incomes shall be chargeable under the head "Income from business or profession", namely:

(a) profits and gains of any business or profession carried on; or deemed to be carried on, by the assessee at any time during the income year;

(b) income derived by any trade, profession and similar association from specific services performed for its members; and

(c) value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.

Explanation: Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as "speculation business") shall be deemed to be distinct and separate from any other business carried on by the assessee.

"30. Income from other sources:‑‑‑(1) Income of every kind which may be included in the total income of an assessee under this Ordinance shall be chargeable under the head "Income from other sources" if it is not included in his total income under any other head.

(2) In particular; and without prejudice to the generality of the provisions of subsection (1), the following income shall, save as otherwise provided in this Ordinance, be chargeable under the head "Income from other sources" namely:.

(a) dividend;

(b) interest, royalties and fees for technical services;

(c) ground rent;

(d) income from the hire of machinery, plant or furniture belonging to the assessee and also of buildings belonging to him if the letting of the building is inseparable from the letting of the said machinery, plant or furniture; and

(e) any income to which subsection (12) of section 12 or section 13 applies.

Section.22 lays down the types of Income which will be income from business or profession i.e. profits and gains of any business or profession carried on, or deemed to be carried on by the assessee at any time during the income year, income derived by any trade, profession and similar association from specific services performed for its members and, value of any benefit or perquisite whether convertible into money or not, arising from business or the exercise of a profession. By the explanation, the speculative transactions have been made distinct and separate business from any other business carried on by the assessee. On the other hand section 30 appears to be a residuary provision which provides that income of every kind which maybe included in the total income of a an assessee under this Ordinance shall be chargeable under the head income from other sources if it is not included ‑in his total income under any other head subsection (2) specific some of such income chargeable under the head of income from other sources namely dividend, interest, royalties and fees for technical services, ground rent, income from hire of machinery, plant or furniture belonging to the assessee and also of buildings belonging to him if the letting of the building is inseparable from the letting of the said machinery, plant or furniture and, any income to which subsection (12) of section 12 or section 13 applies.

The Assessing Officer dealt with the case of the appellants to be the one covered under clause (d) of subsection (2) of section 30 and decided that the appellants income is to be assessed as income from other sources. The Tribunal has maintained such decision of the Assessing Officer. The Tribunal on examining the, record has given a finding of fact that the appellants have completely closed down their business and have leased out the entire factory and the income that the appellant is drawing is from lease of property and thus the matter is governed by section 30 of the Ordinance. Among the cases relied by the learned counsel for the appellant is a case of Sultan. Brothers Private Ltd. v. Commissioner of Income Tax Bombay City II a judgment of Supreme Court of India reported in (1964) 51 ITR 353. The facts and question involved in this case are stated in one paragraph and it is quoted as follows:‑‑

"The appellant which is a limited company is the owner of a certain building constructed on Plot No.7 on the Church Gate Reclamation in Bombay which it had fitted up with furniture and fixtures for being run as a hotel. By a lease dated August 30,1949, the appellant let out the, building fully equipped and furnished to one Voyantizis for a term of six years certain from December 9, 1946, for running of hotel and for certain other ancillary purposes. The lease provided for a monthly rent of Rs.5,950 for the building and a hire of Rs.5,000 for the furniture and fixtures. The question in this appeal is how the income received as rent and hire is to be assessed, that is, under which section of the Income Tax Act, 1922, is it assessable? The appellants contends that the entire income should be assessed under section 10 as the income of a business or, in the alternative, the income should be assessed under section 12 as income from a residuary source, that is, a source not specified in the preceding sections 7 to 11; with the allowances respectively specified in subsections (3) and (4) of that section."

After examining the provisions of the Income Tax Act, 1922 and the case‑law, the Court observed at page 362 as follows:‑‑

"Subsection (4) of section 12 must, therefore, be applicable when machinery, plant, or furniture are inseparably let alongwith the building by the owner. If subsection (4) of section 12 is to have any effect and it is the duty of the Court so to construe every part of a statute that it has effect it must be held that the income arising from the letting of a building in the circumstances mentioned in it is an income coming within the residuary head. If a person cannot be assessed under section 12 in respect of the rent of a building owned by him, subsection (4) will become redundant, there will be no case in which the allowances mentioned by it can be granted in computing actual income from a building.. An interpretation producing such a result is not natural. We must, therefore, hold that when a building and plant, machinery or furniture are inseparably let, the Act contemplates the rent from the building as a residuary head of income."

.

After examining the clauses of the lease, the Court further observed at page 365:‑‑

"We, therefore, think that the clauses in the lease on which the respondent relies do not indicate that the letting of 'the building was separate from the letting of the furniture and fixtures. We think that the lease satisfies all the conditions for the applicability of section 12(4) and is covered by it."

Now section 12(4) of the Income Tax Act considered by the Indian Supreme Court in the above cited case is similar in wording to that the section 30(2)(d) of the Ordinance. The only difference is that the provision of the Act, additionally pinpoints the allowances to which the assessee will be entitled while in the Ordinance the provision for allowances is separately made in section 31(1)(c). This difference in the wording of the provision of the Act and Ordinance is not material in considering the present appeals as the matter relating to allowance is consequential which arise after the application of provision for assessment is identified.

Apart from the judgment of the Indian Supreme Court (supra) which we find to be applicable, to the two appeals in hand and supporting the case of the Department; we also find that the leases in the present two appeals satisfies all conditions for the applicability of section 30(2)(d) of the Ordinance as admittedly letting of the building is inseparable from the letting of plants, machineries, godowns, machinery room etc. of the appellants flour mills. The arguments of the learned counsel for the appellants regarding wheat quota use of telephones employment of Chowkidars and payment of taxes are of no relevance to the controversy in these two appeals.

Therefore, the question raised in the two appeals and quoted above is answered in affirmative. Resultantly, the two appeals are dismissed.

S.A.K./S‑354/KAppeals dismissed.