TMI Blog1987 (8) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... ars under consideration. Questions Nos. 3 to 6 which form the subject-matter of Taxation Cases Nos. 34 to 40 of 1977, at the instance of Revenue, are apart from the questions referred at the instance of the assessee which, as already observed earlier, are identical in so far as the Revenue is concerned. Question No. 3 is the subject-matter for the assessment year 1965-66 only. Questions Nos. 3 and 4 relate to the assessment years 1965-66 to 1969-70, questions Nos. 3 to 5 are common for the assessment years 1965-66 to 1969-70 and question No. 6 relates to the assessment year 1971-72 only. The facts of the case are culled out from the statement of the case as submitted by the Tribunal under section 256(1) of the Act, which may well be described hereinafter. The assessee is a corporation with 100 per cent. share with the Government. It is a Government of India undertaking. It was assessed in the status of a company. The assessee-company, namely, Bokaro Steel Limited, Bokaro Steel City, was incorporated on January 29, 1964, when the certificate of incorporation was given by the Registrar of Companies. The object of the company was to construct and own an integral iron and steel work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t heads specified under section 14 of the Act. He taxed receipts from property let out to outsiders under section 22 and the other receipts as " income from other sources ". He, however, did not charge to tax the amount received from the employees of the assessee-company for the residential accommodation allotted to them. The Income-tax Officer assessed the income of the assessee in the various years as under : ------------------------------------------------------------------------------------------------------------------------------------------------- Assessment House Interest Miscellaneous Hire year property on advances income charges to employees, etc. ------------------------------------------------------------------------------------------------------------------------------------------------- 1 2 3 4 5 ------------------------------------------------------------------------------------------------------------------------------------------------- Rs. Rs. Rs. Rs. 1965-66 -- 2,554 -- 56 1966-67 31,118 6,723 -- 7,224 1967-68 93,499 19,998 -- 12,195 1968-69 1,54,461 26,876 -- 17,913 1969-70 4,64,845 2,31,306 5 46,342 1970-71 10,08,331 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction. The Appellate Assistant Commissioner, however, conceded to this plea of the assessee-company in part only. He confirmed the action of the Income-tax Officer with regard to receipts from property and interest from advances to employees, etc., as also on short-term deposits. But as regards the receipts from hire charges, royalty land-rent, liquidated damages and miscellaneous income, the Appellate Assistant Commissioner agreed with the assessee-company that these went to reduce the cost of construction and, accordingly, allowed the assessee company's claim in this regard. The assessee-company went in further appeal before the Tribunal against the assessment partly sustained by the Appellate Assistant Commissioner while the Department went in appeal before the Tribunal against the relief allowed by the Appellate Assistant Commissioner in those years. As regards the receipts from property, the contention of learned counsel for the assessee was that the charges received were from the quarters given to the contractors for the residence of their staff during the period of construction and that was not income and, in any case, it was not " income from property ". These quarters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. According to learned counsel for the assessee, the use of the property in the case of the assessee-company was use of a commercial asset. The Revenue, however, contended that income from letting out of quarters was liable to be assessed under section 22 of the Act and that the use by the assessee-company could be distinguished from the facts in the cases relied upon by the assessee-company. It was also stated that the power available to the assessee-company under the articles only enabled it to let out the property but that it could not alter the head under which it had to be assessed. The Tribunal, for the reasons stated by it in its order dated May 25, 1975, held that the receipts from letting out property to outsiders were chargeable under section 22 of the Act as income from property. The assessee-company had stated in its application under section 256(1) that the following common questions pertaining to this issue may be referred to this court for opinion: "(1) Whether, on the facts and in the circumstances of the case, the receipts arising from the letting out of the quarters to outsiders, such as, employees of the contractors engaged in the construction of the plant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se were to be considered against the expenditure incurred for their maintenance. The assessee-company had also received interest from the contractors which was brought to tax by the Income-tax Officer. This was confirmed by the Appellate Assistant Commissioner in appeal. The Tribunal, however, deleted the addition observing that the intention of the assesseecompany in making the advances to the contractors was not-to earn interest but to ensure and see timely execution of the construction work and that the interest earned must be taken as incidental to the overall construction work and should be allowed to be adjusted against the actual expenditure by the assessee-company. The assessee-company had also received in 1971-72 a certain sum as interest on the amount advanced by it to M/s. Hindustan Steel Limited for supply of locomotives and the Income-tax Officer included this amount as income, which was confirmed in appeal by the Appellate Assistant Commissioner. The Tribunal, however, conceded the assessee-company's case that it had returned the engines in the next year and that, therefore, there was no real income and thus deleted the addition. The Department contended that the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the royalty of Rs. 25,928 received from the contractors was not taxable as it was of capital nature and not revenue ? Assessment year 1970-71: (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest received by the assessee-company on, the amount of Rs. 7,50,502 advanced to the contractors was not taxable ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the hire charges of Rs. 182 received by the assessee-company for letting out the plant and machinery to the contractors were not taxable ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the royalty of Rs. 13,052 received from the contractors is not taxable as it is of capital nature and not revenue ? (4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding miscellaneous receipt of Rs. 49 as not taxable ? Assessment year 1971-72 : (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid; (v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59 ; (va) the value of any benefit or perquisite taxable under clause (iv) of section 28 ; (vi) any capital gains chargeable under section 45 ; (vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of provisions contained in the First Schedule; (viii) any annuity due, or commuted value of any annuity paid, under the provisions of section 280D; (ix) any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever ;" The law is well-settled and no discordant note to the contrary has been struck so far that section 2(24) is merely an inclusive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something, which is often loosely spoken of as 'capital'. But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production." In Maharaj Kumar Gopal Saran Narain Singh v. CIT [1935] 3 ITR 237 (PC) at page 242, Lord Russel of Killowen added the important amplification to the definition as laid down by Sir George Lowndes in these words ; " Anything which can properly be described as income, is taxable under the Act unless expressly exempted." In Raja Bahadur Kamaksh a Narain Singh v. CIT[1943] 11 ITR 513 (PC), at pages 521, 522 and 523, Lord Wright repeated these observations of both and remarked: "income, it is true, is a word difficult and perhaps impossible to define in any precise general formula. It is word of the broadest connotation............ Sir George Lowndes speaks of 'income' being likened pictorially to the fruit of a tree or the crop of field. But it is clear that such picturesque similies cannot be used to limit the true character of income...... Income is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's contentions, however, were that these receipts were not taxable at all as these were incidental to the assessee's business of construction and that these had gone merely to reduce the cost of construction, although the Income-tax Officer included the receipts and assessed them under the relevant heads specified under section 14 of the Act. He taxed receipts from property let out to outsiders under section 22 and the other receipts as " income from other sources ". He, however, did not charge to tax the amount received from the employees of the assessee-undertaking for the residential accommodation allotted to them. The income from house property was calculated by the income-tax Officer after deducting the allowances permissble under section 22. As we have already stated at the outset, the income from hire charges was taken at the rate of 11% of the total receipts in the year. Before the Appellate Assistant Commissioner, it was contended on behalf of the assessee that these had merely gone to reduce the expenses and the cost of construction. The Appellate Assistant Commissioner, however, accepted this plea of the assessee-company in part only. He confirmed the action of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilised for reduction in the cost of construction. It was further added by learned counsel for the assessee that the Department had not brought to tax the amount received by the assessee-company from its own employees for the quarters similarly provided to them for their residence and that, in the same manner, the charges received from the outsiders (contractors' employees) could also not be charged to tax by the Department. In the alternative, as already stated earlier, it was contended on behalf of the assessee that the receipts from such outsiders could, at best, be considered as income from business only and in this connection, a reference was made to the objects clause (Y) of the assessee-company, according to which the assessee-company could sell, let, dispose of or grant right over all or any property of the company. It was asserted that letting out of the property was thus a part of the assessee's business and that any receipts received in connection therewith constituted business income of the assessee-company. The point made, in the alternative, was that in that event, it could claim for more expenses against the income as against the income treated as from property where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... industan Steel Limited had replaced the said 8 locomotives by new ones and that these had ceased to be as on loan. The amount of Rs. 7,39,232 was not, in the circumstances, an income at all and that in view of the contra entry made in the next year, it ought to be excluded from its income in 1971-72. In any case, the-amount in question was never the real income of the assessee-company. Learned counsel for the assessee further stated before the Tribunal that there were two other items of interest, namely, Rs. 7,50,502 and Rs. 14,93,993, which were received from the contractors as per the supplementary agreement arrived at by the assessee-company with them. The assessee-company had supplied extra funds to the contractors. As per the supplementary agreements, the contractors were required to pay interest on the amounts paid in excess to them. Payments made to the contractors were not against their bills. According to learned counsel for the assessee-company, the amount received as interest from the contractors on these excess payments could go only to reduce the cost of construction. As regards the receipts considered as " income from hire charges ", learned counsel for the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... findings need be quoted here: "In the matter before us, the, assessee-company was to embark on iron and steel manufacturing business. It constructed some quarters for its own employees. The construction of the factory was still on when some of the tenements were found to be surplus to the requirements of the assessee-company. It let out these quarters to the contractors engaged in the construction of the township for use by their employees. The contractors were also at that time on the look out for residential accommodation for their own employees. There was an adjustment between the two situations and the adjustment was in respect of the use of the property for which rental was to be paid by the contractors. Having regard to all these facts, we are of the view that in the matter before us, the receipts from letting of property to the outsiders was chargeable under section 22 of the Income-tax Act, 1961, as income from property and we hold accordingly." Although we have quoted this as a 'matter of fact' it is, in our view, an inference from the facts hereinbefore stated. Evidently, therefore, this part of the finding of the Tribunal is an inference based upon facts which m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the same." On these findings of fact arrived at by the Tribunal, obviously, the assessee-company's receipts from the contractors were held to be in the hands of the assessee-company, a capital receipt and not a business of the assessee-company, and they were also found to be incidental to the overall construction work and allowed to be adjusted against capital expenditure. If, therefore, on a parity of reasoning, we are persuaded to hold that the letting out of the surplus tenements to the contractors for allocation of the same to their employees were incidental to the overall construction work during the pre-business starting period, they should be allowed to be adjusted towards capital expenditure although in the nature of receipts as in the case of liquidated damages, interest and so on. The moot question before us to be determined, therefore, would be as to whether the letting out of the surplus quarters or the tenements to the contractors for allocation of the same to their employees were incidental to the overall construction work; whether they should be treated as income taxable under any head or merely treated as connected with the erection of the buildings for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bservient to and incidental to the main business, section 9 of the Indian Income-tax Act, 1922, did not apply and the expenditure incurred by the assessee for the repair and maintenance of the residential quarters was allowable as deduction from the profits of the business of the assessee. Of course, in this case, this court was dealing with the allowable deduction of the assessee. All the same, it was held that the letting out of the residential quarters was subservient to and incidental to the main business. In principle, therefore, whether it be an allowable deduction for the repair and maintenance of the residential quarters or it be a receipt in the hands of the assessee for letting out the residential quarters being subservient to and incidental to the main business would make no difference. This decision of this court was approved by another Bench decision in the case of Rohtas Industries Limited v. CIT [1961] 41 ITR 524. Irk that decision also, Ramaswami C.J. was speaking for the Bench. There was a slight difference between the facts of the case of Rohtas Industries Limited [1961] 41 ITR 524 (Pat) and the case of Jamshedpur Engineering and Machine Manufacturing Company [195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quarters occupied by the employees of the assessee were incidental to the main business of the assessee and assessment should be made under section 10 of the 1922 Act and it was not disputed by learned counsel for the assessee that in respect of the rent realised from the outsiders, the assessment should be made under section 9 of the 1922 Act. Even so, this court held ultimately that ([1961] 41 ITR 524 at p. 527): "In our opinion, the principle laid down by this High Court in Jamshedpur Engineering and Machine Mfg . Co. Ltd. v. CIT [1957] 32 ITR 41 (Pat) governs the present case." Applying the principle laid down in the case, it was held that ([1961] 41 ITR 524 at p. 527): ".. ...... in the facts and circumstances of the present case, the rent realised by the assessee-company from the buildings of which it is the owner and which have been let out to its employees is assessable under section to of the Indian Income-tax Act and not under section 9 of the Indian Income-tax Act." Be that as it may, the principle as laid down in the case of Jamshedpur Engineering and Machine Manufacturing Company Limited [1957] 32 ITR 41 (Pat) was approved and relied upon by this court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofessional income, can be brought to tax only if it can be so done under the rules of computation laid down in section 10. If it cannot be so brought to tax, it cannot be brought under the residual head 'Income from other sources' and it will escape taxation even if it be included in the total income under section 4. (iv) The words if not included under any of the preceding heads in section 12 refer to income and not to a head of income. Section 12, therefore, deals with income which is not included in any of the preceding heads. If the income is so included, it falls outside section 12. Section 12 does not say that an income which escapes taxation under a preceding head will be computed under it for chargeability to tax. " This decision, on principle, does favour the contention of learned counsel for the assessee. It is of no use multiplying decisions cited at the Bar since we have now got a direct decision on the point of the Delhi High Court in D.L.F. Housing and Construction (P.) Ltd. v. CIT [1983] 141 ITR 806. In that case, the assessee-company carried on the business of colonisation, that is, it used to purchase lands mostly agricultural, situate in villages contiguous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icultural land which is not capital asset as envisaged by section 12B will not fall within the ambit of even the extended definition of " income " in section 2(6C). The assessee-company spent a sum of Rs. 89,710 towards renovation and re-construction of a house let out to its managing director on rent. The Tribunal held that it would be fair and reasonable to take one-half of the building as occupied for the purpose of the company's business and allow about one-half of the amount towards repairs and that the balance was not allowable as a deduction. It was held by the High Court that in the absence of material on record to suggest that the motivation of letting out a portion of the building to the managing director was for facility of business in the sense that it was essential for better management and control of the assessee's business, the view taken by the Tribunal was correct. Buildings let out to the employees of the assessee may be said to be occupied by the assessee-owner for the purposes of his business envisaged in section 9 only if there is material to show that such occupation of the employees is incidental and subservient to the business of the assessee. In the insta ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
