Commissioner of Income Tax vs Shriram Jute Products Ltd.

Ajit K. Sengupta, J.—In this reference u/s 256(1) of the income tax Act, 1961 (''the Act'') at the instance of both the revenue as well as the assessee, the following questions of law have been referred for the opinion of this Court:

Questions at the instance of the revenue:

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that rental income derived from letting out of the godowns amounting to Rs. 11,61,691 (for assessment year 1983-84) and Rs. 11,61,961 (for assessment year 1984-85) should be treated as business income and assessed as such?

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the set off of unabsorbed business losses should be allowed against the income derived from letting out of the godowns?

Questions at the instance of the assessee:

Whether, on the facts and in the circumstances of the case, and on a correct interpretation of the relevant provisions of the income tax Act, the Tribunal misdirected itself in law in holding:

(a) That the addition of differences in rental income derived from Shriram (Overseas) Pvt. Ltd. (the then subsidiary company) and including the said amount of Rs. 90,110 (for assessment year 1983-84) and Rs. 67,597 (for assessment year 1984-85) again in the hands of Shriram Jute Products Ltd. (the then Holding Company) and

(b) That whether it at all leads to any division of income and would be taxed again when the same amount was already taxed in the hands of Shriram (Overseas) Pvt. Ltd.? and

(c) That whether it was justified in assessing the said amount under the head ''Income from other sources''?

We would first deal with the references at the instance of the revenue. It relates to the income tax assessment of the assessee-company for the previous years ending 31-10-1982 and 31-10-1983, corresponding to the assessment years 1983-84 and 1984-85.

The relevant facts as found by the Tribunal are as under:

The assessee-company is engaged in the business of manufacture and sale of Laminated Jute Bags. It also derived income from letting out of godowns and offered the same for assessment under the head ''Profits and gains of business or profession'' and claimed set off of brought forward business losses against such rental income. In the earlier years, income derived by the assessee-company from letting out godowns was assessed as business income, but during the two years under reference, the ITO observed that the position had changed substantially and the rental income from letting out of godowns could no longer be assessed as business income. The ITO found that until 1980 the assessee-company was engaged in the business of manufacturing Jute Goods. At that time, it used to let out surplus capacity in its godowns for temporary periods. These godowns were being utilised by the assessee-company for storage of raw materials, finished goods, stores and other materials in connection with jute manufacturing business. The rental income from letting out such surplus capacity for temporary period was being assessed as business income.

However, subsequently, on account of various constraints more particularly inadequate funds required for modernisation of the Jute Mill machinery, inadequate power supply and continuous labour troubles, the assessee-company suspended its activity of manufacturing Jute Bags in the year 1981. The ITO also found that during the previous year relevant to the assessment year 1983-84, the assessee-company sold machinery of the value of Rs. 6,20,532 and in the previous year relevant to the assessment year 1984-85, there was another sale of Jute Mill machineries of Rs. 13,97,105. The balance machineries in the hands of the assessee-company as evident from the balance sheet drawn as at 31-10-1983 was Rs. 6,26,339 only which admittedly related to Laminated Bag Division.

From the aforesaid facts, the ITO concluded that the assessee-company has permanently stopped its Jute Mill business since the relevant machineries installed in the Jute Mill Factory had already been sold away. He, therefore, observed that the godowns ceased to be commercial assets of the assessee- company and the rental income therefrom could no longer be assessed as business income. The assessee-company also incurred substantial expenditure for extension, addition and alteration in the godowns in order to make them suitable for hiring out on long-term basis.

The ITO, therefore, observed that the principles of res judicata were not applicable as altogether a new fact-situation had emerged calling for a fresh consideration. There was complete change in the facts and circumstances of the assessee''s business activities, it can no longer be said that letting out of godowns constitute exploitation of commercial assets by the assessee-company. Since the Jute Mill business was completely stopped and the godowns in possession of the assessee-company were far in excess of its requirements, the godowns let out in the two previous years under reference cannot any more be considered as commercial assets.

The ITO, therefore, assessed the rental income from letting out of the godowns under the head ''Income from other sources'' and refused to set off the brought forward business losses against such income.

On appeal by the assessee, the Commissioner (Appeals) also found that there was no clause in the memorandum and articles of association permitting the company to let out its godown. He, therefore, felt that in the absence of any specific clause in the memorandum of association, the letting out of godowns cannot be said to be a business proposition.

He, therefore, agreed with the ITO that the rental income was rightly assessed as ''Income from other sources''.

On further appeal by the assessee, the Tribunal observed that the assessee had two manufacturing units (1) Jute Goods Manufacturing Unit, and (2) Laminated Bags Manufacturing Unit. Although Jute Mill business was closed, the assessee-company was continuing to carry on the manufacture and sale of Laminated Bags. The Tribunal also found that the letting out of assets is permitted not by the main Objects Clause, but by the clauses containing objects incidental and/or ancillary to the attainment of the main objects. According to the Tribunal, the letting out of the godowns by the assessee-company was nothing but exploitation of its commercial assets through the agency of another person. The Tribunal also found that in the process of letting out, the assessee-company also provided electric power from its Generator, weighing facilities, Watch and Ward Staff and filtered and unfiltered water.

The Tribunal referred to and applied to the decision of the Supreme Court in Commissioner of Income Tax, Lucknow Vs. Vikram Cotton Mills Ltd., and held that the rental income in both the years under reference was assessable to tax as business income.

We have gone through the orders of the authorities below and have also heard the counsel appearing for the parties. In our view, the Tribunal has clearly misdirected itself in holding that the rental income from the godown was assessable as business income. It is an admitted position that the assessee was no longer carrying on the business of manufacturing and selling Jute Goods. The Jute Mill machinery have been admittedly sold by the assessee-company during the two previous years relevant to the assessment years 1983-84 and 1984-85. The machinery now in possession of the assessee-company are all relating to Laminated Bags Division. There is no finding of the Tribunal that the Jute Mill Manufacturing and the Laminated Bag Manufacturing Divisions are part and parcel of the same business.

Further more, having regard to the scale of operations and requirement of space for Laminated Bag Unit, there was no material before the Tribunal to hold that the godown space which was let out continued to be its commercial assets. The past records reveal that the assessee-company had been letting out its godown even during the earlier years when the Jute Mill was running. In other words, it had a surplus capacity even at that time. When the Jute Mill has been completely closed, it is clear that the surplus capacity of godowns has increased manifold. It cannot be said that the godowns let out continue to be commercial assets of its Laminated Bag Division which is the only business activity currently being carried on by the assessee-company. The Tribunal also did not make any enquiry as to the terms and conditions, more particularly, the period for which the godowns were let out to different persons.

In Vikram Cotton Milk Ltd.''s case (supra) the Supreme Court held that in each case, the intention has to be gathered as to whether the commercial asset was intended to be exploited by the assessee or whether it was intended to be used by letting out for a temporary period. It is predominately a matter of intention. Intention is an inference to be drawn from the relevant facts. In this case, as we have already noted earlier, Jute Mill manufacturing business has been completely closed, as the relevant machinery had already been sold away.

Letting out of godowns, in these circumstances, cannot be said to be a case of exploitation of commercial assets. The godowns are no longer commercial assets of the assessee. There is nothing to suggest that godowns were let out for temporary period and the assessee-company had no intention of resuming Jute Mill manufacturing operation by setting up a new Jute Mill. The godowns which were let out are admittedly far in excess of the requirements of the existing business activities of the assessee-company.

In these circumstances, we are of the view that both the ITO as well as the Commissioner were right in holding that the godown rent was assessable as income under the head ''Income from other sources'' and the Tribunal had no material before it to come to a contrary finding and in holding that the godown income should be assessed as business income.

We, therefore, answer both the questions referred to us at the instance of the revenue in the negative and in favour of the revenue.

Coming now to the only question referred at the instance of the assessee, the ITO observed in the assessment order as under:

Examination of miscellaneous receipts reveals that the assessee-company had rented out some godowns to Shriram (Overseas) Pvt. Ltd. which in turn rented out the same to the Central Warehousing Corporation on a higher rent, the difference being Rs. 67,597. This amount is brought to tax in the hands of the assessee as this is nothing but diversion of income.

The said addition was confirmed by the Commissioner (Appeals) as well as by the Tribunal. The Tribunal noted in the facts relating to the letting out of godown by the assessee-company to Shriram (Overseas) (P.) Ltd. were more appropriately discussed in the assessment order of the latter company passed by the same ITO on 10-3-1986 in respect of the assessment year 1983-84. The relevant facts as given in the assessment order of Shriram (Overseas) (P.) Ltd. are as under:

Regarding rental income disclosed by the assessee it appears that Shriram Jute Mills Ltd. (Now Shriram Jute Products Ltd.) who held the entire paid-up capital of the assessee-company let out some portion of its covering sheds to the assessee-company, who in turn, sublet the same to others at higher rate and the difference of income was disclosed as income from business. On scrutiny of records it appears that by an agreement dated 1-11-1980 Shriram Jute Mills Ltd. let out to the assessee- company covered area of 68,914 sft. at 43/1, Garden Reach Road, Calcutta, i.e., part of its factory premises to the assessee-company on a monthly rental of Rs. 37,902 w.e.f. 1-12-1980 and assessee-company sublet it to Central Warehousing Corporation on a monthly rental of Rs. 44,794 w.e.f. the same date. The assessee also took on rental another portion of covered shed measuring 6,177 sft. from the said Shriram Jute Mills Ltd., on a monthly rental of Rs. 6,486 and sublet it to Central Warehousing Corporation on a monthly rent of Rs. 7,104 w.e.f. 19-10-1981 for which no agreement was made.

The Tribunal observed that the assessee did not file copy of tenancy agreement entered into by and between Shriram (Overseas) (P.) Ltd. and Central Warehousing Corporation. The Tribunal also noted that while the assessee-company let out the godowns to Shriram (Overseas) (P.) Ltd. at Rs. 37,902 per month, the very same space was let out by Shriram (Overseas) (P.) Ltd. to Central Warehousing Corporation at Rs. 44,794. The whole of the paid-up capital of Shriram (Overseas) (P.) Ltd. is held by the assessee-company. After considering all the facts on record, the Tribunal observed that it was apparent that a Division was created by the assessee to reduce its taxable income artificially.

The Tribunal, therefore, held that the ITO was justified in including the sums of Rs. 90,110 and Rs. 67,597 in the total income of the assessee-company for the assessment years 1983-84 and 1984-85 respectively under the head income from other sources''.

We have not been shown as to how the Tribunal was in error in coming to this finding. We may, however, add that the rental income claimed to be assessable as business income by the assessee-company also included rent from the aforesaid godowns let out to its own subsidiary. This fact also goes to show that the godowns in question no longer continue to be commercial assets.

As for the question of the surplus rent being taxed twice over, once in the hands of the assessee and again in the hands of Shriram (Overseas) (P.) Ltd., we have to say that the question does not appertain to the assessment of the assessee in the instant reference. It is for the other company, viz,, Shriram (Overseas) (P.) Ltd. to agitate that issue and claim relief as is legitimately due to it. Having regard to the facts found by the Tribunal, we answer the question referred at the instance of the assessee in the affirmative and in favour of the revenue.

Sen, J.

I agree.