Hindu Cotton Press Company Ltd. vs Commissioner of Income Tax

Pritpal Singh, J.—The assessee company, namely, Hindu Cotton Press Company Limited, Anaj Mandi, Ambala City, has filed this petition u/s 256(2) of the Income Tax Act, 1961 (hereinafter referred to as " the Act"), desiring this court to refer the following questions of law to the High Court :

" (i) Whether, on the facts and in the circumstances of the case, the activities of the company in letting out its factory godowns, when not in use, as in the past and on contractual basis, constitutes functioning of the company within its objects as provided for in the memorandum and articless of association of the company ?

(ii) Whether, on the facts and in the circumstances of the case, the income out of the letting out of the company''s godowns from time to time is income from business, i.e., exploitation of commercial assets of the company or income from house property ?

(iii) Whether, on the facts and in the circumstances of the case emerging from the evidence and material on record, the finding recorded by the Tribunal that the assessee company after 1974 had completely stopped its business activity with no prospect whatsoever of its resumption of such business activity is vitiated in law being perverse ?

(iv) Whether the expenses incurred by the company for the year under consideration in the maintenance of office, establishment, chowkidar, stationery, electricity, audit and directors'' fees, etc., are admissible expenses against the income of the company for the year under the circumstances ?

(v) Whether, on the facts and in the circumstances of the case, the company is entitled to set off and adjustment of brought over losses of the previous year as determined by the Income Tax Officer ? "

The petitioner was carrying on the business of ginning cotton and pressing it into bales. It had installed machines for this purpose and had also constructed godowns for the storage of the raw materials as well as the finished goods. It let out some of the godowns and derived a rental income of Rs. 33,696 during the assessment year 1977-78. In the return filed for this assessment year, the petitioner-company included this rental income as a part of the income from business. The Income Tax Officer did not agree with this plea and held that the rental income was income from house property. This view was confirmed on appeal by the Commissioner of Income Tax (Appeals) and on further appeal by the Income Tax Tribunal. The petitioner-company thereafter moved an application u/s 256(1) of the Act requiring the Income Tax Appellate Tribunal to state the case and refer the aforementioned questions of law to the High Court for its opinion. The Tribunal, however, declined the application holding that no question of law arose out of its appellate order. This necessitated the petitioner-company to file the instant petition u/s 256(2) of the Act.

It may be noticed that in all the above questions, the sole controversy centres round the point as to whether - or not the aforementioned rental income of the petitioner-company was assessable under the head " Income from house property " and not as " Income from business ". The Income Tax Officer in his order dated January 30, 1980 (annexure P-3), held that during the assessment year 1974-75, the petitioner-company had sold away some of its ginning machines with a view to close down its business. No business was carried on by the company thereafter and then the godowns were let out during the assessment year 1977-78 by which a rental income of Rs. 33,696 was derived. The Income Tax Officer observed that during the relevant assessment year, what had happened was not a temporary cessation of business activity but a complete stoppage of the same and, consequently, the letting out of the godowns did not give rise to " Income from business ". The Commissioner of Income Tax (Appeals), on appeal filed by the petitioner-company, looked further into the facts of the case and held that disputes having arisen among the directors of the company in 1974, the company stopped functioning and eventually on Januarys, 1980, Shri Mohan Lal Aggarwal, one of the directors, initiated proceedings u/s 433 of the Act for the winding up of the company. In this background, it was found that when the petitioner-company let out the godowns during the assessment year 1977-78, the company was not functioning and the business activity of the company had completely stopped after 1974 with no prospect of its resumption. It was resultantly held that the godowns were let out by the company not as a business pro-position but in its capacity as an owner of the property and as such the income derived therefrom could only be regarded as " Income from house property ". In the second appeal, the Income Tax Appellate Tribunal affirmed all these facts in its order dated November 24, 1980 (annexure P-5).

Thereafter, the petitioner-company applied u/s 256(1) of the Act to the Income Tax Appellate Tribunal requiring it to draw up a statement of the case and to refer four of the abovementioned five questions, said to be of law arising out of its order (annexure P-5), for the opinion of the High Court. Question No. (iii) mentioned above was not among the questions sought to be referred. The Tribunal, vide order annexure P-7, declined to make a reference, on the ground that no question of law arose from its order dated November 24, 1980 (annexure P-5), and what has been held constitutes findings of fact.

It was held by the Supreme Court in Commissioner of Excess Profit Tax, Bombay City Vs. Sri Lakshmi Silk Mills Ltd., that the yield of income by acommercial asset is no doubt the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business and it cannot be said that an asset which was acquired and used for the purpose of the business ceased to be a commercial asset of that business as soon as it was temporarily put out of use or let out to another person for use in his business or trade, but if the commercial asset is not capable of being used as such then, its being let out to others, does not result in an income which is the income of the business. In the present case, a concurrent finding of fact has been given by the Income Tax Officer, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal that the business activity of the petitioner-company had come to an end after 1974 and thereafter it had become impossible for the company to function. Some of the machines had also been disposed of by the company with a view to close down its business. It was unambiguously found that what had happened after 1974 was not a mere loss in the business activity of the petitioner-company but a complete stoppage of such business with no prospect whatsoever of resumption. These findings of fact have become unassailable and cannot be reagitated. Hence, it follows from these findings that the petitioner-company''s godowns were not capable of being used as commercial assets of the company when they were let out to others during the assessment year 1977-78 and, as such, the rental income therefrom cannot be considered to be the income of the business. In view of the law laid down by the Supreme Court in Commissioner of Excess Profit Tax, Bombay City Vs. Sri Lakshmi Silk Mills Ltd., the answer to the questions involved in this case would be manifestly against the assessee and it would not serve any purpose to issue the mandanus prayed for.

As a result of the aforesaid, this petition is dismissed. No order as to costs.