TMI Blog1985 (12) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... see-company is calendar year and it closed on31st Dec., 1980, for the assessment year presently under consideration. 3. In pursuance of the object mentioned in sub-cl. (1) of part A of cl. (3) of the Memorandum of Association, referred to above, the company entered into an agreement on 1st Jan., 1980 with the Proprietors of the firm, M/s Pushpa Aggarwal Co. namely Shri Harish Aggarwal, and his wife, Smt. Pushpa Aggarwal, to purchase from them a property, which they had built on a plot of land, situated at 7 Jamrudpur, New Delhi and which had been let out by them to M/s Mohan Exports (India) (P) Ltd. The agreement dt.1st Jan., 1980stipulated, inter alia as below: "That M/s Pushpa Agarwal Co. (P) Ltd. consisted of two equal co-owners, namely Harish Aggarwal and Smt. Pushpa Aggarwal, owning 5 storeyed commercial complex standing on plot No. 7, Jamrudpur, New Delhi, with an investment of Rs. 8,01,167.86, over a plot measuring 218.50 sq. yards. That the said property hitherto, under the co-owners of Shri Harish Aggarwal and Smt. Pushpa Aggarwal, under the name of M/s Pushpa Aggarwal Co. shall now vest in the company, the vendee. That the said property, namely, 7, Jamrudpur, Ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l charges 940 vi. Filing fee 150 vii. Electricity charges 270 and similar other small expenses including audit fee of Rs. 250. 5. The assessee-company filed its return of income, declaring an income of Rs. 1,02,220, as below: i. Net profit as per P L A/c Rs. 91,289 Add 15 per cent of interest paid i.e. of Rs. 72,872 Rs. 10,931 . Rs. 1,02,220 5A. The ITO did not accept the above computation of income. He pointed out in his order that "during the year, all that the assessee company has done is to receive rent from M/s Mohan Exports India (P) Ltd. There is no other line of activity, whatsoever. The only question that arises is, whether the assessee-company could be said to be carrying on business at all. The mere letting out of property could not be the said to be the business and they will be assessable under the head "income from house property. In support of the above the ITO relied upon the decision of the Hon ble Calcutta High Court in the case of Commercial Properties Ltd. AIR 1928 (Cal) 456. Accordingly, the ITO computed the income of the assessee under the head "P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention was drawn to sub-cl. (3) of Part A of cl. III of the Memorandum of Association and it was pointed out that, by letting out the property to the tenants, the company had started doing business in terms of the aforesaid sub-cl. (3) and it was, therefore, wrong on the part of the CIT(A) to alleged that the assessee-company had not set up it business and that the expenditure, debited in its accounts were not allowable to it. According to the learned counsel for the assessee, even if the income from the property were assessable under the head "Income from property in terms of ss. 22 to 27 of the Act, it would not be conclusive of the question, as to whether or not the assessee-company had set up its business for the term business in the context of the said company setting up its business, will have a different connotation than that spelt out in s. 28 of the IT Act, 1961. In support of the above proposition, our attention was invited by the ld. counsel for the assessee to the following decisions: 1. CIT vs. Cotton Fabrics Ltd. (1981) 23 CTR (Guj) 247 : (1981) 131 ITR 99 (Guj). 2. CIT vs. NewIndiaInvestment Corpn. Ltd. (1978) 113 ITR 778 (Cal) 3. CIT vs. Admirality Flats Mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id that the business of the assessee-company had been set up, even though receipts on account of such business had not started flowing in. according to the ld. counsel, there was a clear distinction between the commencement of the business and the setting up of business and for the purpose of IT Act, what had to be looked at, was setting up of the business and, the commencement of the business and once the business is shown to have been set up, the expenses incurred had to be allowed in terms of s. 28. In the present case, the various activities of the Directors and their search for a proper business indicated that the business had been set up and the company was already to do whatever business came its way. According to him, business came its way. According to him, business is said to have been set up when it can be shown that the structure of he business is established and it is ready to commence business, though there may be an interval between the setting up of the business and the commencement of the business and all expenses incurred during that interval would be permissible deductions. 8. The above submissions were opposed by the ld. Departmental Representative, who pointe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n let out by them to M/s Mohan Exporters (India) (P) Ltd. and from which the co-proprietors were deriving rental income. By acquiring the said property and realising rent therefrom, can it be said that the assessee had set up its business ? In the case of Karanpura Development Co. Ltd. (1962) 44 ITR 362, their lordships of the Hon ble Supreme Court have laid down the principles on the basis of which the problem, as the one above, should be resolved. According to their lordships "Ownership of property and leasing it out may be done as a part of business, or it may be done as land owner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is "income from property" under s. 9, even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties, not with a view to leasing them as properties, but to selling them or turning them to account even by way of leasing them out as an integral par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to above. It was a building with 800 room. A company was formed for the express purpose of acquiring it and utilising it. The room were let unfurnished to tenants, but there was some slight service in the shape of heating and cleaning. The company also retained some room as its offices. The Company was first assessed under r. 8(c)(i) of Sch. A (VII) of the English IT Act, 1918, which provided for the assessment of landlords in respect of tenants in the case of any house or building let in apartments and tenements. The company paid the tax assessed of it. Then a notice was sent under Schedule D. the company admitted that it had to pay tax under Sch. D on profit it might have made from the services it rendered, but contended to the income, which had been taxed under Sch. A could not be taxed under Sch. D . The company demanded a case, Rowlatt J. held against the company, but his decision was reversed by the Court of Appeal. On further appeal to the House of Lords, it was held that rents were profits from ownership of land and assessment under Sch. A was the proper mode and they could not be treated as trade receipts of the Company for purposes of Sch. D. 11. The facts in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny business. We have discussed the facts with regard to is as above. It is true that, in the cases of CIT vs. Laxmi Co. (1982) 133 ITR 905 (Mad) and CIT vs. Admiralty Flats Motel (1982) 133 ITR 895 (Mad) their lordships of the Hon ble Madras High Court have held that the classification of various heads of income under the IT Act is only for the purpose of convenience of the administration of the Act and the concept of business, as envisaged under the It Act cannot be imported into the determination of the question as to whether as group of individuals by an agreement carry on business as a firm. In that case, one Shri G. and his wife entered to a partnership for the purpose of carrying on business as lodging house-keepers. They derived income in the course of the said business from letting out of the flats and renting out of the furniture and other articles. The ITO held that the income derived by the firm by letting our flats was assessable only as income from property and hence their was no business with reference to which there could be a firm and, therefore, refused registration to the firm the Tribunal, in second appeal held that, while the income from letting out the flats wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the to less. The facts of CIT vs. Cotton Fabrics Ltd. (1981) 23 CTR (Guj) 247 : (1981) 131 ITR 99 (Guj) and CIT vs. New India Investment Corpn. Ltd. (1978) 113 ITR 778 (Cal) were also different. There the assessees were carrying on business of dealing in shares and securities, in the course of which the income from dividends on shares held by them as stock-in-trade was realised. The question for determination was, whether, while computing the income under the head "Dividend" in terms of s. 56 of the IT Act, 1961 any expenditure should be set off against the said dividend income. It was held by their lordships of the Hon ble Gujarat and Calcutta High Courts respectively why no apportionment ought to be made as the dividend income was, in fact, realised in the course of assessee s business and such of the expenses were business expenses and the mere fact that the dividend income was to be computed under s. 56 would not make the business expenses as expenses covered by s. 57. In the present case, there is no business at all, and the only income is from property and, therefore, the facts of the aforesaid case and the ratio stated therein have no relevance with the facts of the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e done by the learned counsel in this regard was to draw our attention to the Resolution passed by the company on24th Feb., 1982, appearing at page 44 of the assessee s paper book. But the said Resolution was passed much after the accounting period had ended and it is not, therefore, possible for us to accept the assessee s contention on the basis of this Resolution to the effect that the assessee-company had set up a business during the previous year under consideration. The only Resolutions pertinent to the previous year under consideration which have been placed on record, are contained at pp. 32 33 and they relate only to the fixation of meeting fees to be given to the Directors, fixation of remuneration of the Directors, designation of the First Directors of the Company and the co-option of Shri Rakesh Bansal as one of the Directors. These Resolutions did not go to establish that the assessee-company had set up any business during the previous year under consideration. 19. The authorities relied upon by the Departmental Representative, in our opinion, squarely cover the facts of the present case. 20. In view of the above, we are of the opinion that the orders of the auth ..... X X X X Extracts X X X X X X X X Extracts X X X X
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