TMI Blog1983 (12) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... our minors admitted to the benefits of partnership. Profit sharing ratio of the partners is mentioned in clause 7 of the partnership deed. The nature of the business sought to be carried on by this firm is mentioned in clause 3 of the partnership deed as 'tobacco business', both local and foreign, or any other business which may prove to be lucrative and which may be carried on with the mutual consent of the parties. The firm name is given as Sundaram Tobaccos and it is stated to have its head office at Guntur with a branch at Ganapavaram. Clause 1 of the partnership deed gives the option to open branches at other places also if necessary. A copy of the partnership deed was provided at pages 2 to 7 of the paper book filed before us. The assessee now before us is the said firm Sundaram Tobaccos. It has purchased 2.5 acres of land in R.S. No. 79 (O.S. No. 2) in Keesara Village, Nandigama Taluq, Krishna District and constructed godowns, grading halls, inspection halls and office-cum-guest house. For the sake of compendious expression, we call all the above constructions as 'Godown'. The construction of the godown was completed on 19-12-1975. Another godown and office building, etc., w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss from VSTCO. 5. The intendment of taking on lease by VSTCO can be known from the letter obtained from the director of the said company which is as follows: "LDD/PS/619 September 1, 1983 Sundaram Tobacco Co. PO Box 77 Guntur 522 001 Dear Sirs, Regarding your enquiry about the construction and leasing of the godowns and grading halls at Keesara in 1975/76, I have to inform you that we do not have any correspondence in our records. It is, however, a fact that the godowns and grading halls were constructed at our instance and leased to us with the understanding that you will process our tobacco at those premises. This had taken place after discussions between your representatives and the representatives of our company including the undersigned. You have been regularly processing our tobacco at the said premises since then and were being paid processing charges at the rates agreed to between us from time to time. Yours faithfully Sd/--- (B.L. BERY) Director" The charges agreed upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lary depreciation allowance claimed was denied. 6. In appeal, the Commissioner (Appeals) held that the decisions in National Newsprint Paper Mills Ltd.'s case and Prem Chad Jute Mills Ltd.'s case were not in fact applicable to the facts of the present case. In the first case, it was held that the dominant purpose of the letting out of the godown was to enable the assessee to carry on its business more efficiently and smoothly and the activity of letting had a definite nexus with the business that the assessee was carrying on. From the facts of that case, the rent received by the assessee from letting out godown to the Government departments was found to be incidental to the assessee's business and as such it was found to be taxable as income from business. In the second case, decided by the Calcutta High Court also, before considering whether the income derived from leasing of an asset is income from business or income from property, four tests are to be kept in mind : (1) in order to be a business income, there must be evidence of exploitation of a commercial asset ; (2) the exploitation of a commercial asset does not necessarily mean exploitation by the assessee himself at al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee from letting out the godown is not business income and is to be assessed as income from property. Therefore, the panchayat taxes payable over the godown as well as the depreciation claimed over the godown were disallowed and the ITO's order bringing the income under the head 'Income from house property' is held to be quite valid and the appeal before him was dismissed for all the assessment years under consideration. Hence, the second appeal. 7. According to Shri A. Satyanarayana, the learned counsel for the assessee, cases of income from leasing out a property can be broadly categorised under four heads: (a) Cases where the whole activity carried on by the assessee was letting out the property it owns or possesses. Under this head fall the following decisions---East India Housing Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC), O. RM. SP. SV. Firm v. CIT [1960] 39 ITR 327 (Mad.), Karnani Properties Ltd. v. CIT [1971] 82 ITR 547 (SC), Indian City Properties Ltd. v. CIT [1965] 55 ITR 262 (Cal.), Manohar Singh v. CIT [1965] 58 ITR 592 (Punj.), CIT v. Pandyan Bank Ltd. [1969] 71 ITR 707 (Mad.) and CIT v. Admiralty Flats Motel [1982] 133 ITR 895 (Mad.). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d should be considered as part of the business income. 8. On the other hand, Shri N. Santhanam, the learned departmental representative, opposing the claim of the assessee tooth and nail, made the following submissions before us. Firstly, he contended that the letter dated 1-9-1983 which the assessee had produced clarifying the contemporaneous idea or state of thinking of VSTCO at the time of taking the Keesara godown on lease from the assessee from 1-1-1976 should not be admitted as it amounts to fresh evidence which was not at all processed either by the ITO or by the Commissioner (Appeals). He also contended that all the results which flow from the lease should not be lost sight of. The true legal relationship which results from the transaction should not be ignored. He cited the decision of the Supreme Court in CIT v. B.M. Kharwar [1969] 72 ITR 603. He submitted that for the provisions of section 22 of the Act to apply, the assessee itself should be occupying the godown. Occupying the godown through somebody else is not contemplated under that section. Here, in this case, the lessee is deemed to be in occupation of the property but not the lessor. He drew our attention to sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out to them from 1-1-1976. The learned departmental representative also wanted to rely upon the decision of this Tribunal in I.T. Appeal No. 1115 (Hyd.) of 1978-79. 9. In reply, Shri A. Satyanarayana, the learned counsel, countered the learned departmental representative's argument and stated that the owner need not actually occupy the premises and in support thereof he cited the decision of the Punjab High Court in Delhi Cloth General Mills Co. Ltd.'s case. Ultimately, he submitted that the facts of this case are quite identical with the facts considered by the Calcutta High Court in Tinsukia Development Corpn. Ltd. v. CIT [1979] 120 ITR 466. 10. Thus, we considered the respective arguments advanced by both the parties, and having duly considered the facts on record as well as the arguments advanced before us, we are inclined to accept the arguments advanced on behalf of the assessee. Our reasons are as follows. 11. The assessee was already having 17 branches situated in and around Guntur. The business which it carried on was in tobacco---purchasing tobacco, redrying, grading, stripping and packing it and also selling it in India as well as abroad. From the facts on recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of the facts independently ascertained by us, there is in fact no fresh material which in contained in the letter of 1-11-1983 for the purposes of decision of this case. 12. In the case of Hindustan Machine Tools Ltd.'s case, the HMT Ltd. had constructed 50 sheds forming an industrial estate with the object of having ancillary units which would manufacture components required for the purposes of the machines in the manufacture of which it is engaged, and these sheds were leased out to several persons on rental basis. The object of HMT Ltd. was to set up a large number of small-scale feeder industries in the industrial estate owned and maintained by small-scale entrepreneurs mainly of worker-proprietor type, and to sub-contract to them the simpler components which do not require heavy equipment or high degree of skill and technique. The entrepreneurs for the units were selected by HMT Ltd. itself having regard to the candidate's experience in the particular line, his technical competence and his genuine enthusiasm to build up competitive small-scale industrial units. Several facilities were afforded by HMT Ltd. to the ancillary units including free technical advice, traini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tely for supply of cool air. Ultimately, the Bombay High Court held that the Tribunal was justified in holding that the carrying on of these activities by the assessee amounted to the carrying on of business and income derived from the same was to be assessed as business income. 15. The principle enunciated in Karanpura Development Co. Ltd.'s case at page 377, which was approved and reiterated in S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC), is as follows: "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..." 16. Having considered the facts and circumstances of this particular case, we are inclined to hold that the leasing out of the Keesara godown must have been done as part of business activity of the assessee-firm and, therefore, in our opinion, the lease amount derived by the assessee-firm from VSTCO under the terms of the lease deed dated 19-7-1975 should be taxed as business income and not as income from property. Thus, the assessee succeeds on the main ground in all these appeals. 17 to 38. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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