TMI Blog1951 (3) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... to expand its business, the construction of a new building now known as Dare House was commenced in 1938 and was completed in 1941 at a cost of ₹ 6,80,000. Out of the amount required for the construction of the new building a sum of five lakhs of rupees was raised by debentures. Even before the completion of the building, the directors by a resolution passed by them in 1940 decided to let portions of the old and new buildings to different persons for an aggregate rent of about ₹ 3,000 per mensem. This resolution was not referred to in the statement of the case; but it was read before us by Mr. Rama Rao Sahib, learned counsel for the Commissioner of Income-tax, and was not disputed on behalf of the assessee. After completing the construction of the building, the assessee company occupied only about a half of the building for its business and used one half of the old building as its godowns. One half of the new building and one half of the old was let out to various persons in pursuance of the resolution of the directors of the year 1940. From 1941 till the date of the present dispute, the assessee paid income-tax on the rents realised from both the buildings on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich prevailed with the assessee company in not occupying the entire buildings for the purpose of their business. If the assessee is able to establish that really the erection of the building and the letting of the portion of the buildings not occupied by it was part of the business of the assessee company within the meaning of the Excess Profits Tax Act it would succeed. The definition of business in the Excess Profits Tax Act is different from that contained in the Income-tax Act. Section 2(5) of the Excess Profits Tax Act contains the definition of business. The two provisos in the definition are relevant and they alone are set out below. The are:- Provided that where the functions of a company or of a society incorporated by or under any enactment consist wholly or mainly in the holding of investments or other property, the holding of the investments or property shall be deemed for the purpose of this definition to be a business carried on by such company or society. Provided further that all businesses to which this Act applies carried on by the same person shall be treated as one business for the purposes of this Act. The first proviso, it will be seen, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company should consist wholly or mainly in the holding of the property whereas in sub-rule (4) the business consists wholly or partly in the letting out of property. That the main purpose should be the holding of the property is not emphasised in sub-rule (4) of rule 4. As pointed out by Mr. Rama Rao Sahib, learned counsel for the Commissioner of Income-tax, there is a way, and I think a very reasonable way, of reconciling the two provisions, if the second proviso to sub-clause (5) of Section 2 is kept in mind. The second proviso treats as one business all the business of an assessee and it is for that reason in sub-rule (4), the word partly is used. If a business consists of several businesses it will be an apt description to treat one of such businesses as part of the business as all the businesses are treated as one unit. The sub-rule, therefore, cannot be construed as if the requirement of proviso that it should wholly or mainly be the holding of the property for the purpose of the business has not been adopted in the rule. The word business used in sub-rule (4) must be defined and understood in the sense in which it is used in the definition read along with the proviso. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to deal in it or earn profits by it is not within the objects. It is rather difficult to read into these clauses of the memorandum of association a power in favour of the assessee company to construct houses for the purpose of letting them out as part of its business. It is open to them to construct buildings for purpose of their own business and for their own occupation and as incidental to such business. It is not within the objects of the company and it is not part of its business to construct buildings for the purpose of letting them out for rent. In the course of the arguments, certain decisions were referred as throwing light on the question when exactly the letting of property such as houses can be treated as constituting business within the meaning of Section 10 of the Income-tax Act or within the meaning of the Excess Profits Tax Act. In Commissioner of Income-tax, Madras v. Gin and Rice Factory, Guntur [1926] I.L.R. 50 Mad. 529, a Special Bench consisting of Sir Murray Coutts-Trotter, C.J., Krishnan and Beasley, JJ., had to consider the question whether the leasing of a factory along with its machinery and plant for rent is a business within the meaning of Section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was entitled to deduct from its income a sum for depreciation of the buildings and furniture at Ootacamund which was leased by the assessee company. Leach, C.J., at page 180 adverted to the fact that under clause 3(j) of the memorandum of association of the assessee company, the assessee was authorised to let for rent the undertaking, viz., the business of carrying on the hotel or any part of it, and therefore the letting of the Ootacamund hotel was part of the business of the company. The principle of the decision in Commissioner of Income-tax v. Rice and Gin Factory, Guntur [1926] I.L.R. 50 Mad. 529, already referred to, was applied. It will be seen that that case was analogous to the case before the learned Judges except that in the one case the lease related to a rice mill and in the other to a hotel business. Of the other learned Judges, Mockett, J., agreed with the view of Leach, C.J., but Krishnaswami Ayyangar, J., differed. The principle of these two decisions is that if by its memorandum of association a company is empowered to erect buildings, in which plant and machinery was fixed or furniture and other articles useful for business were brought in, and to let them for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on thus sought to be made by the learned Chief Justice in the latter case. If as part of the money-lending business an asset like house property was acquired, there is no reason to treat income from it as assessable only as income of house property under Section 9 and not as income of the business, such assets form the stock-in-trade of the money- lending business. The distinction seems to have been recognised in some cases that if from the house property only income is realised it would be taxable for the purpose of income-tax under Section 9 of the Act; but if the asset so acquired is sold and profit was made such profit would be profit of business within the meaning of Section 10 of the Income-tax Act. The distinction made in Valliappa v. Commissioner of Income-tax, Madras [1945] I.L.R. 1945 Mad. 693; 13 I.T.R. 49, at page 696 between the decision of the learned Judges in Annamalai v. Commissioner of Income-tax, Madras [1945] I.L.R. 1945 Mad. 170; 12 I.T.R. 254, and the case which they were called upon to decide may not be, if I may say so with respect, a logical distinction; but however it is unnecessary to deal with that question in this case and express any final opinion. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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