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Judgment
G.T. Nanavati, J.—The Income Tax Appellate Tribunal has referred the following questions u/s 256(1) of the Income Tax Act, 1961, to this
court at the instance of the assessee :
(1) Whether, the Tribunal was right in law in holding that the assessee was not entitled to vacancy allowance in respect of property that was
neither struck with sterility nor was at any time in the past let out and was always vacant ?
(2) Whether, on the facts and in the circumstances of the case, the assessee was entitled to get the vacancy allowance or exclusion for occupancy
for business purposes for the properties wherein machines were lying ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to the
deduction of municipal taxes in respect of properties which were not let ?
For the assessment years 1968-69, 1969-70, 1971-72 and 1972-73 :
Whether, on the facts and in the circumstances of the case, the income was rightly taxable under the head ''Business income'' and not ''Income
from house property'' ?
For the assessment year 1971-72 :
Whether the Tribunal was right in rejecting the claim of deduction of Rs. 26,512 which was the excess income taxed in the earlier years
because of the decision in this year fixing the standard rent at Rs. 335 against the contractual rent of Rs. 601 ?
For the assessment year 1970-71 :
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the additional ground to the effect that
the income was taxable under the head ''Business'' and not ''Income from property'' could not be entertained ?
As the questions which have been referred to us arise out of the judgments and orders passed by the Tribunal in five separate appeals pertaining
to five separate assessment years, the Tribunal ought to have made five separate references. As that has not been done by the Tribunal, we direct
the office to register five separate references by treating Income Tax Reference No. 277 of 1980 as reference arising out of Income Tax Appeal
No. 1192 of 1976-77. Other Income Tax references are to be numbered as References Nos. 277A, 277B, 277C and 277D of 1980 treating
them as arising out of the judgments and orders in Income Tax Appeals Nos. 1193 and 1195 of 1976-77, 361 of 1975-76 and 1193 of 1974-75,
respectively. The five assessment years are 1968-69, 1969-70, 1970-71, 1971-72 and 1972-73.
The assessee is a private limited company. Formerly, it was doing the business of ginning and spinning and for that purpose, it had constructed a
textile mill and also acquired substantial immovable properties over which godown and office buildings were constructed. The business of ginning
and spinning was closed years ago. The assessee started selling its business assets on and from March 20, 1946. The claim raised by the assessee
that it had already closed its business and that its assets had ceased to be commercial assets was accepted by the Department in different
proceedings. As there was no possibility of restarting its original business, the assessee passed a resolution on January 16, 1964, deciding to
modify the memorandum of association by including some more activities as the activities of the company. One such activity included in the
memorandum of association was purchasing or acquiring lands and properties or to sell them. The assessee does not appear to have acquired any
new land or building or constructed new buildings but the buildings which were constructed or acquired for the original activity of spinning
continued to be owned by the assessee. Some machinery which was till then not sold occupied some parts of the buildings. Some of those
buildings were let out by the assessee. The properties which were let out by the company underwent some change from year to year because of
old tenants leaving the premises and new tenants being inducted. Some buildings were in such a dilapidated condition that they could not be used.
During the assessment proceedings, except for the assessment year 1970-71, the assessee had raised a contention that income received by way of
rent should be taxed as business income and not as income from property u/s 9 of the 1922 Act. It was also contended that income in respect of
the property which was not actually let out should either be excluded from computation or the assessee should be granted vacancy allowance. This
vacancy allowance should be granted not only in respect of the property which has remained vacant nor let out but also in respect of the property
wherein machinery was lying. A contention was also raised that the assessee was entitled to a deduction of municipal taxes in respect of the
property not let out the annual letting value of such property should have been determined accordingly.
In respect of the assessment proceedings for the assessment year 1971-72, a contention was raised that the assessee was entitled to a
deduction or set off of Rs. 26,512, which was excess income in the earlier years on the basis of rent received then but which rent came to be fixed
at a lower rate during that assessment year. Some other contentions were also raised but we are not concerned with them in this reference.
The Income Tax Officer considered the income of the assessee as income from property and not as a income from business. He disallowed the
claim for deduction of municipal taxes and determined the annual letting value accordingly, following the decision in the case of Liquidator,
Mahmudabad Properties Ltd. Vs. Commissioner of Income Tax, . The Income Tax Officer also disallowed the claim for vacancy allowance in
respect of the properties which were not let out.
The assessee''s appeal before the Appellate Assistant Commissioner failed and the further appeal to the Tribunal also met the same fate.
What is contended by learned counsel for the assessee is that after 1964, the income which the assessee had earned by letting out these
properties should have been regarded as business income, and not as income from property. He submitted that, by passing a resolution, the
company had modified its memorandum of association and included in it the activities of purchasing or otherwise acquiring lands and buildings for
constructing them and letting out such properties. Therefore, after 1964, it became the business of the assessee to let out properties. The
properties which were already let out and which came to be let out thereafter were, therefore, in the course of its business of letting and, therefore,
the income received by it from such properties should be regarded as business income. In support of this contention, he drew our attention to a
decision of this court in the case of Commissioner of Income Tax, Gujarat Vs. Motilal Hirabhai Spg. and Wvg. Co. Ltd., wherein it is held that
(headnote) :
In taxing statutes the word ''business'' is used in the sense of an occupation or profession which occupies the time, attention and labour of a person
normally with the object of making profit. In order to infer from a course of transactions that the person intended thereby to carry on business,
ordinarily the characteristics of volume, frequency, continuity and regularity indicating an intention to continue the activity of carrying on the
transaction must exist.
Relying upon these observations, learned counsel submitted that the assessee carried on the activity of letting out its properties and through the
volume of business was not large, looking to the nature of business, it cannot be said that letting out of property was not in the course of transacting
its business. But as pointed out in that judgment, no test is decisive of the intention to carry on business. In the light of all the circumstances, an
inference that a person desires to carry on business has to be raised. Merely because the assessee included in its memorandum of association the
activity of purchasing or acquiring lands and buildings or constructing them and letting them, it cannot be said that thereby it had embarked upon
that activity or business. That has to be inferred from the subsequent conduct of the assessee.
The next decision relied upon by earned counsel for the assessee is the decision in the case of Commissioner of Income Tax, Lucknow Vs.
Vikram Cotton Mills Ltd., . In that case, it was found as a matter of fact that the intention of the company was not to part with the assets but to
lease them out for a temporary period as a part of exploitation. Considering that fact and other circumstances, the Supreme Court affirmed the
decision of the Commissioner of Income Tax Vs. Vikram Cotton Mills Ltd., which had taken the view that, from the said fact and other
circumstances, it could not be said that no business was carried on or that the income derived by the company from letting out the machinery was
only rental income. In that case, the High Court held that the income derived by the company by way of lease rent from the letting out of its assets
was assessable to tax under the head ""Profits and gains of business"" and that decision was affirmed by the Supreme Court. But, as pointed out
therein, whether a particular income is income from business or from investment must be decided according to the general common sense view of
those who deal with such matters, the particular circumstances and the conduct of the parties concerned. As pointed out by the Supreme Court, it
is predominantly a matter of intention. Intention is an inference to be drawn from the relevant facts. The whole transaction is to be viewed from the
standpoint of an ordinary prudent businessman.
Therefore, what we have to find out in this case as indicated by the Supreme Court is as to whether the assets were treated by the assessee as
commercial assets and whether the commercial assets were intended to be exploited by the assessee as commercial assets or were intended to be
used by letting them out on rent. In short, the true nature of the activity carried on by the assessee is required to be found out. As pointed out
above, the assessee had closed its business of spinning long time ago, i.e. even before March 20, 1946. It is amply clear that it had no intention to
restart the business. It did not carry on any business thereafter nor had it any intention to carry on any business and till 1964, the only activity which
it carried on was to let out its properties and earn rental income. Only in 1964, it amended its memorandum of association but its subsequent
conduct shows that except carrying on the old activity, the assessee had not done anything more as would indicate that it had embarked upon a
new activity of purchasing or acquiring lands or buildings or constructing new buildings to let them on rent. The properties which were let out were
allowed to remain with the tenants and the properties which became vacant, either because the tenants vacated them or because some machines
housed in those properties were sold, were let out by the assessee. Not a single building was purchased or acquired by it. Even upon open land
which the assessee possessed, it did not construct any new building. No attempt was made by it to repair those buildings which were usable. Thus,
no attempt was made by it to make any property in its possession fit enough for the purpose of business of letting. Therefore, it cannot be said that
the assessee intended to exploit these assets as commercial assets for the purpose of business. From the conduct of the assessee, it becomes clear
and, in our opinion, the Tribunal was right in coming to the conclusion that what the assessee intended was to earn income by letting out properties
by treating them as properties. That income which the assessee received as a result of letting out the properties was as an owner of the properties
and not in any other capacity. The Tribunal was right in treating the income received by the assessee as a result of letting of the properties as
income from property and not accepting it as business income. The circumstances that the assessee was allowing tenants to use its telephone and
had engaged a watchman to look after the properties cannot be of any avail to the assessee as, admittedly, the expenses incurred by the assessee
for that purpose did not constitute one per cent of the total income received by it by way of rent.
It was submitted by learned counsel for the assessee that, with respect to the properties which were neither struck with sterility nor let out and
with respect to the properties were machines were lying, the assessee should have been granted vacancy allowance. In support of his contention,
he relied upon clause (ix) of sub-section (1) of section 24. It is provided by that clause that, where the property is let out and was vacant during a
part of the year, that part of the annual value which is proportionate to the period during which the property is wholly unoccupied or, where the
property is let out in part, that portion of the annual value appropriate to any vacant part which is proportionate to the period during which such
part is wholly unoccupied, then, before computing the income from the house property, deduction on that count has to be granted. Now, this is not
a case where property was let out and was vacant during a part of the year and, therefore, it is difficult to appreciate how this clause can apply to
the facts of the case. What was contended was that the property was let out in the past and merely because it was not let out during the relevant
accounting year, the benefit of this provision cannot be denied to the assessee. As pointed out by the Supreme Court in Liquidator of
Mahamudabad Properties P. Ltd. Vs. Commissioner of Income Tax, West Bengal-II, section 24(1)(iv) cannot apply if the building was not let out
during the previous year. The reason given by the Supreme Court is that, while reading section 24(1)(ix), which speaks of property which is let and
which was vacant during a part of the year, we have to read it to mean property which was let during the previous year and was vacant during a
part of the year. It cannot refer to property which was not let at all during the previous year. The Tribunal was, therefore, justified in not accepting
the assessee''s claim made u/s 24(1)(ix).
It was seriously contended on behalf of the assessee that, in any case, the assessee was entitled u/s 23 to deduction of municipal taxes in
respect of the property which was not let out. Section 23 as it then stood was as under :
(1) For the purpose of section 22, the annual value of any property shall be deemed to be the sum for which the property might reasonably be
expected to let from year to year :
Provided that whether the property is in the occupation of a tenant and the taxes levied by any local authority in respect of the property are, under
the law authorising such levy, payable wholly by the owner, or partly by the owner and partly by the tenant, a deduction shall be made equal to the
part, if any, of the tenant''s liability borne by the owner.
Sub-section (2) as it then stood was as under :
(2) Where the property is in the occupation of the owner for the purpose of his own residence, the annual value shall first be determined as in sub-
section (1) and further be reduced by one-half of the amount so determined or one thousand eight hundred rupees, whichever is less.
As we are not concerned with the proviso and the Explanation, we have not reproduced the same. What was contended was that the annual
value of the property is to be determined on the basis of a fiction that the property is let to a tenant. Once such fiction is raised, the proviso
automatically becomes applicable and, therefore, even in respect of the property which is not let out and which is in the occupation of the owner,
deduction of municipal taxes has to be granted while determining the annual value for the purpose of section 23. In support of his contention,
learned counsel relied the decision of this court in Commissioner of Income Tax, Gujarat III Vs. Arvind Narottam Lalbhai Dalpatbhai Vada,
wherein this court had held as under (headphone) :
While calculating the annual letting value of the property in the occupation of the owner for the purpose of his residence, municipal taxes had to be
deducted. It was clear that by the use of the words ''further to be reduced in sub-section (2) of section 23 of the Income Tax Act, 1961, the
Legislature had clearly indicated that the deduction of municipal taxes contemplated by the proviso and the Explanation to sub-section (1) as they
existed prior to April 1, 1969, had to be made, and thereafter the amount so determined had to be further reduced as contemplated by sub-section
(2) so far as self-occupied properties were concerned.
For the purpose of proper interpretation of section 23(2), this court also referred to section 23(1) and observed as under (at page 386) :
Therefore, the question that we have to ask ourselves is as to what is meant by the words ''determined as in sub-section (1)''. It is obvious that
what the main part of sub-section (1) provides for is the determination of the annual value of all properties, whether tenant-occupied or self
occupied, and by the main body of sub-section (1) of section 23, the annual value of any property is to be deemed to be the sum for which the
property might reasonably be expected to let from year to year. This notional or hypothetical annual letting value is the annual value and it any taxes
of any local authority are paid, then as laid down in the provision read with the Explanation as it stood prior to April 1, 1969, the whole or half of
the municipal taxes were to be deducted depending upon whether the property was constructed before April 1, 1950, or after April 1, 1950. But
the proviso and the Explanation only applied in the case of property in the occupation of a tenant and under the proviso to sub-section (1), the
requirements for the application of that proviso were : (1) that the property should be in the occupation of a tenant; (2) the taxes levied by the local
authority in respect of the property should be under the law authorising such levy payable wholly by the owner or partly by the owner and partly by
the tenant; and (3) the deduction was to be made equal to the part, if any, of the tenants liability borne by the owner and by the legal fiction created
by the Explanation, the whole or half of the municipal taxes were deemed to be the tenant''s liability. It is obvious that, on the face of it, if a mere
prima facie view were to be taken, the condition about deduction of the municipal taxes laid down in the proviso to sub-section (1). Namely, that
the property should be in the occupation of a tenant, would not apply to property in the occupation of the owner for the purpose of his own
residence... The words ''further be reduced'' indicate that some deduction from the annual letting value has already been carried out before further
reduction contemplated by sub-section (2) of section 23 can be considered and that further reduction can only be of the municipal taxes as
contemplated by the proviso to sub-section (1) read with the Explanation to that proviso. There is no other meaning that can possibly be attached
to the words ''further be reduced''.
In Commissioner of Income Tax, Gujarat III Vs. Arvind Narottam Lalbhai Dalpatbhai Vada, this court was concerned with a claim made u/s
23(2), i.e., in respect of the property in occupation of the owner for his residence. In that context and in view of the language used in sub-section
(2), this court held as stated above. Moreover, with due respect, it has to be stated that the learned judges constituting that Bench stressed what
was to be deemed further than what was intended by section 23(1). What it provided was that the annual letting valued had to be determined on a
notional or hypothetical basis, i.e., on the basis of what a willing tenant would have paid by way of rent. It did not create a fiction of tenancy and,
therefore, the proviso cannot have any application because the proviso contemplates a tenant in fact. Even so, we would have been required to
follow that decision or to refer the matter to a larger Bench but for the fact that we have now a decision of the Supreme Court on the point. The
Supreme Court in the case of Liquidator of Mahamudabad Properties P. Ltd. Vs. Commissioner of Income Tax, West Bengal-II, has, in terms,
held that the proviso to section 23(1) can be availed of only if the property was in the occupation of a tenant and no deduction of municipal taxes
can be granted to the assessee if the building was vacant during the previous year. We cannot distinguish that decision or refuse to follow the same
as desired by learned counsel for the assessee, on the ground that the main part of section 23(1) has not been considered by the Supreme Court
and the Supreme Court was only concerned with the proviso to section 23(1). On page 38 of the report, the Supreme Court has specifically
referred to the claim for deduction made u/s 23(1) and after referring to section 23, it has held as under :
The proviso to section 23(1) can be availed of only if the property is in the occupation of a tenant. It would seem so on the language of the
proviso. The assessee does not rest his claim on any other provision of law. In the circumstances, the High Court is right in denying the claim in
respect of municipal taxes.
Therefore, in view of the decision of the Supreme Court in Liquidator of Mahamudabad Properties P. Ltd. Vs. Commissioner of Income Tax,
West Bengal-II, the contention raised on behalf of the assessee cannot be accepted. Earlier also, the Full Bench of the Bombay High Court in
NEW PIECEGOODS BAZAR CO., LTD. Vs. COMMISSIONER OF Income Tax, BOMBAY CITY., had taken the same view as can be
seen from the following observation made in the separate but concurring judgment of Chagla J. (at page 330)
Now, Mr. M. V. Desai''s grievance is this : he says that he has in fact not received all the income which he has shown under that head on income
from property. He says that he had paid the municipal property tax and the urban immovable property tax and, therefore, he should be permitted
to deduct the amount paid for the municipal property tax and the amount paid for the urban immovable property tax before arriving at the figure of
the bona fide annual value of the property. Now, that contention is clearly based on a fallacy because income on property is not based on what the
landlord actually receives. It is based on the none fide annual value of the property. If a landlord claims any deductions, he must come under one or
other of the heads which are contained in the sub-section to section 9 of the Income Tax Act and which are considered to be allowances which
can be made to a landlord in taxing his income to Income Tax. In fixing the rent a landlord takes into consideration all his outgoing and fixes a
reasonable rent, and one of the outgoing in this case happens to be the municipal property tax and the urban immovable property tax. It would be
entirely erroneous to suggest that a landlord is allowed to deduct from the rent which he receives all the outgoing before the bona fide annual value
of the property is arrived at. The bona fide annual value of the property is the rent which the landlord receives. The outgoing are matters for
allowances, and if a particular outgoing is a permissible allowance u/s 9, then the Income Tax authorities could grant that allowance to the
landlord.
It may be stated that the said decision of the Bombay High Court was overruled by the Supreme Court (see NEW PIECE GOODS BAZAR
CO., LTD., BOMBAY Vs. COMMISSIONER OF Income Tax, BOMBAY., , but that was on a different point. In Commissioner of Income
Tax Vs. I. Chatterji, also, the Bombay High Court has held that there is no provision in section 23 whereby, for the purposes of computing the
annual letting value of self-occupied house property, local or municipal taxes paid by the owner can be deducted. The Bombay High Court differed
from the view taken by this court in Commissioner of Income Tax, Gujarat III Vs. Arvind Narottam Lalbhai Dalpatbhai Vada, and followed the
Full Bench decision in NEW PIECEGOODS BAZAR CO., LTD. Vs. COMMISSIONER OF Income Tax, BOMBAY CITY., . It appears that
the decision of the Supreme Court in Liquidator of Mahamudabad Properties P. Ltd. Vs. Commissioner of Income Tax, West Bengal-II, was not
cited before the Bombay High Court. Following the decision of the Bombay High Court in NEW PIECEGOODS BAZAR CO., LTD. Vs.
COMMISSIONER OF Income Tax, BOMBAY CITY., and the Supreme Court in Liquidator of Mahamudabad Properties P. Ltd. Vs.
Commissioner of Income Tax, West Bengal-II, we hold that, u/s 23(1), while determining the annual letting value of the property, municipal taxes
paid by the owner of the property cannot be deducted if the property is in his occupation.
It was next contended that excess income was taxed in the earlier years i.e., in the years earlier to the assessment year 1971-72 as the annual
letting value was determined on the basis of income actually received by the assessee in those years but the said income got subsequently reduced
as a result of a decision of a competent court. Therefore, in the assessment year 1971-72, a set off should have been granted to the assessee.
Learned counsel frankly conceded that there is no provision for granting such set off. But he submitted that, on the analogy of section 25A, such
relief ought to have been granted to the assessee. Obviously, this contention cannot be accepted because, in the absence of a specific provision, no
relief can be granted. For imposing a burden on the assessee in respect of a wrong relief granted in the earlier years, the Legislature has enacted
section 25A. Therefore, if a relief is to be granted to the assessee in a converse case, then, we must find a suitable provision in the Act. Learned
counsel for the assessee relied upon a decision of this court in Commissioner of Income Tax, Gujarat II Vs. Bachubhai Nagindas Shah, wherein it
is observed as under (headnote) :
It is not doubt true that such deduction is not contemplated by the actual wording of section 16 of the Act. But what has been pointed out goes to
the very root of the notion of income and before anything can be considered ''income'', the principle which follows from the basis approach of
''income accrued'' being considered on the same footing as income received, must be accepted.
Now, these observations are obiter dicta and this court, realising the difficulty in granting such benefit in the absence of provisions, expressed
the hope that the authority concerned would consider the claim of the assessee. In the absence of any provision to that effect, it cannot be head
that the assessee was entitled to the claim of set off and that the Tribunal went wrong in not granting the same.
The last contention raised by the assessee was in respect of the assessment year 1970-71 only. We would have been required to go into that
question if we had come to the conclusion that the income which the assesses had earned was business income. As we have come to the
conclusion that the income was rightly held to be income from property, question No. 5 is not required to be answered. We, therefore, decline to
answer the same.
For the reasons stated above, we answer the other questions referred to us against the assessee and in favour of the Revenue. Reference is
disposed of accordingly. No order as to costs.