JUDGMENT
S.D. Shah, J.
1. On being moved under section 256 of the Income-tax Act, 1961, by the Commissioner of Income-tax, Ahmedabad, by four Reference Applications Nos. 523 to 526/Add. of 1976-77, and also being moved by the assessee by Reference Applications Nos. 517 and 518/Ahd. of 1976-77, the Income-tax Appellate Tribunal has referred the following questions at the instance of the Department for our opinion :
For the assessment year 1968-69 only :
“1. Whether, on the facts and in the circumstance of the case, the Appellate Tribunal was right in law in holding that the payment of bonus and other allowances made by the assessee to its employees each drawing more than Rs. 7,500 as annual salary in excess of 20 per cent. of such salary were not benefit, amenity or perquisite within the meaning of section 40(c)(iii) of the Income-tax Act, 196 ?
2. Whether on the facts and in the circumstances of the case. The Appellate Tribunal was right in law, in holding that the loan agreement in question provided for the repayment of the moneys during a period of not less than seven year ?”
For the assessment year 1971-72 :
“3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the payment made by the assessee to its employees each drawing more than Rs. 7,500 as annual salary in excess of 20 per cent. of such salary did not amount to benefit, amenity or perquisite within the meaning of section (a) (v) of the Income-tax Act, 196 ?”
and, at the instance of the assessee, the following questions are referred for our opinion :
For the assessment year 1971-72 :
“4. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the expenditure incurred on payment of listing fees as regards the assessee’s shares had not been laid out wholly and exclusively for the purposes of the assessee’s busines ?
5. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the rent income derived in respect of factory building No. 2 was chargeable under the head ‘Income from house property’ and that no depreciation was allowable in respect thereof under section 32(1)(ii) of the Income-tax Act, 196 ?
6. If the answer to question No. 5 is in the negative, whether the Tribunal was correct in law in invoking the provisions section 32(1) read with section 38(2) of the Income-tax Act, while holding that, although the factory building was a business asset no depreciation was allowable on the same in view of the character of its user ?”
In fact, on these different applications, the Tribunal has passed an order making the reference of the aforesaid questions to this High Court for its opinion, and, therefore, the Registry of this High Court was required to entertain and register these reference separately, but it has, however, consolidated all the references into one. In view of the fact that there were six separate references received from the Tribunal, six references were required to be registered and we, accordingly, direct the Registry of this court to renumber the aforesaid references as Income-tax reference No. 199 of 1978, and further references as Income-tax References Nos. 199/A to 199/E of 1978.
In order to answer the aforesaid questions referred for our opinion at the instance of the Revenue, as well as at the instance of the assessee, it would be necessary to set out the relevant facts herein.
(i) The assessee is a public limited company manufacturing yard, heads, reeds, cameras and photographic paper The relevant assessment years are 1968-69, 1969-70, 1970-71 and 1971-72.
(ii) For assessment year 1968-69, the Income-tax Officer applied the provisions of section 40(c)(iii) of the Income-tax Act, 1961, and disallowed the amount of Rs. 5,409 which was paid by the assessee-company to certain employees by way of bonus over and above 20 per cent, of the salary of each employee concerned who was drawing actual salary of more than Rs. 7,500 as annual salary. In the other three assessment years immediately following thereafter, i.e., for the assessment year 1969-70 to 1971-72, the Income-tax Officer disallowed the amounts of Rs. 15,637 Rs. 13,894 and Rs. 12.818 under section 40(a)(v) of the Income-tax Act.
(iii) Being aggrieved by the said order of the Income-tax Officer, the assessee went in appeal to the appeal to the appellate Assistant Commissioner who, by a consolidated order dated July 21, 1975, held that the aforesaid excessive payment of bonus did not amount to any benefit, amenity or perquisite within the meaning of section 40(c)(iii) or section 40(a)(v) of the Act. The Appellate Assistant Commissioner, accordingly, allowed the appeal of the assessee on this count mainly relying upon the order of the Income-tax Appellate Tribunal in Income-tax Applicant No. 1628 (Ahd.) of 1970-71 rendered in the case of the present assessee for the assessment year 1967-68 holding that the bonus was part of remuneration and cannot be treated as perquisite. The said decision of the Tribunal in the case of the present assessee for the previous assessment year was accepted by the Department, and, therefore, the Appellate Assistant Commissioner was of the view that the Income-tax officer was not justified in making the additions of the aforesaid amounts and that the said amounts already included were required to be deleted from the income of the assessee.
(iv) Being aggrieved by the said order passed by the Appellate Assistant Commissioner, the Revenue preferred a second appeal to the Income-tax Appellate Tribunal and the Tribunal, by its consolidated judgment and order, held that the bonus paid to the employees is part of their remuneration or salary and that it was not benefit, amenity, perquisite or any other allowance. The tribunal also took the view that, in view of its earlier or in the aforesaid appeal, dated March 31, 1973, it has already rejected all the contentions raised by the Revenue and has held that the payment similar to the payment in question was part of remuneration or salary and, therefore, its deduction could not be disallowed.
(v) The aforesaid decision of the Tribunal has given rise to questions Nos. 1 to 3 which we shall proceed to answer after reference to the fact giving rise to the other questions.
(vi) For the assessment year 1970-71 and 1971-72, the assessee claimed deduction of expenditure amounting to Rs. 1,200 which was spent by the assessee by way of listing fees paid by the assessee to the stock exchange to get its share listed. The Income-tax Officer disallowed the said deduction on the ground that the said amount way not spent in connection with the business asset of the assessee. The said order of the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner and, in further appeal to the Tribunal. The Tribunal also upheld the order of the Appellate Assistant Commissioner. The said order of the Tribunal has given rise to the reference at the instance of the assessee and question No. 4 deals with such expenditure incurred by the assessee on payment of listing fees.
(vii) The assessee owned a building known as “Building No. 2” which was let out by the assessee to M/s. Agra Gaevert India Ltd. on a monthly rent of Rs. 3,500 during the previous year relevant to the assessment year 1970-71 and on a monthly rent of Rs. 2,500 during the previous year relevant to the assessment year 1971-72. Gross annual rent of the said building thus came to Rs. 42,000 and Rs. 30,000, respectively, for the aforesaid two years. The plea of the assessee the income by way of rent should be considered as business income under the head “Profits and gains of business” was not accepted by Income-tax officer on the ground that the income derived from letting out the business asset was taxable under the head “Income from house property”. The said order of the Income-tax Office was confirmed in appeal by the Appellate Assistant Commissioner and, in further appeal to the Tribunal, the Tribunal has confirmed the order of the Appellate Assistant Commissioner. This has given rise to the reference of questions Nos. 5 to 6 to this court at the instance of the assessee.
Answer to question Nos. 1 and 3 :
The first question relates to the assessment year 1968-69 for which the relevant provisions are section 40(c)(iii) of the Income-tax Act, 1961, and the third question relates to the assessment year 1969-70 to 1971-72 for which the relevant provisions are section 40(a)(v) of the Income-tax Act, 1961. Excepting that the questions are to be answered by reference to different provisions as it stood at the relevant time, the question to be answered is a common question with regard to bonus paid to the employees of the assessee-company drawing salary of more than Rs. 7,500 per year. The Income-tax Officer has taken the view that said bonus which was paid in excess of 20 per cent. of salary to each of the employees drawing salary of more than Rs. 75,000 per year could not considered to be part of remuneration or salary and that the said bonus which was in excess of 20 per cent. of salary became salary became part of the perquisite and, therefore, he disallowed the claim for deduction of the said amount beyond 20 per cent. of the salary received. This disallowance was made under section 40(c)(iii) for the assessment year 1968-69 and under section 40(a)(v) for the remaining assessment years. The appellate Assistant Commissioner and the Tribunal have allowed the deduction of the aforesaid amounts of bonus.
Mr. B. J. Shelat, learned counsel for the Revenue, has strenuously urged that the amount of Rs. 5,409 paid for the assessment year 1968-69 and the amount, i.e.,
Assessment year Amount disallowed
(Rs.)
1968-69 5,409
1969-70 15,637
1970-71 13,894
1971-72 12,818
will not form part of remuneration or salary payable to the employees as the same were not payable in law or by order of any Tribunal or labour court or under any service agreement. The said amounts were paid gratuitously and, therefore, deduction thereof was not permissible. On the other hand, Mr. D. A. Mehta, learned counsel for the assessee, has submitted before us that, in view of the language employed in section 40(c)(iii) and the amended provision of section 40(a)(v), the amount of bonus paid by the assessee to the employees drawing more than Rs. 7,500 per year should be treated as part of remuneration or salary payable to the employee inasmuch as the said amount is paid in cash, and the use of words “whether convertible into money or con” in the aforesaid provision would be material In the alternative, he submitted that the term “salary” occurring in section 40(c)(iii) would take within its sweep the term “bonus” despite Explanation 2.
In order to deal with the aforesaid submissions effectively and to answer the aforesaid questions Nos. 1 and 3, it is necessary for us at this stage to refer to the aforesaid two statutory provisions. Section 40(c)(iii) being relevant for the assessment year 1968-69 which was originally introduced by the finance Act, 1963, is as under :
“40. Amounts not deductible. – Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head ‘Profits and gains of business or profession’ …
(c) in the case of any company –
(i) any expenditure which results directly or indirectly provision of any remuneration of benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person, as the case may be…
(ii) any expenditure which results directly or indirectly in provision of any remuneration or benefit or amenity to an employee who is a citizen of India, to the extent such expenditure exceeds the amount calculated at the rate of five thousand rupees per month for any period of his employment after the 28th day of February, 1963…”
Section 40(c)(iii) was amended by the Finance Act of 1964, thereafter it read as follows :
“(iii) any expenditure incurred after the 29th day of February, 1964, which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to an comply (including any sum paid by the company in respect of any obligation which but for such payment would have been payable by such employee), to the extent such expenditure exceeds one-fifth of the amount of salary payable to the employee for any period of his employment after the aforesaid date :
Provided that in computing the aforesaid expenditure any payment by way of gratuity or the value of any travel concession of assistance referred to in clause (5) of section 10 or passage money or the value of any free or concessional passage referred to in sub-clause (i) or any payment of tax referred to in sub-clause (vii) of clause (6) of that section 17 or in clause (v) of sub-section of that section or the amount of any compensation referred to in clause (ii) of sub-section (3) of that section or any payment referred to in clause (iv) or clause (v) or any expenditure referred to in clause (ix) of sub-section (1) of section 36 shall not be taken into account :
provided further that nothing in this sub-clause shall apply to any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite to an employee whose income chargeable under the head ‘Salaries’ is seven thousand five hundred rupees or less.
Explanation 1. – The provisions of this clause shall apply notwithstanding that any amount not to be allowed under this clause is included in the total income of any person referred to in sub-clause (i) or in sub clause (iii).
Explanation. 2 – In sub-clause (iii), the word ‘salary’ shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule.”
The aforesaid sub-clause (iii) came to be omitted by the Finance Act, 1968, with effect from April 1, 1969, and, therefore, for the relevant assessment years, i.e., 1968-69 to 1971-72 newly inserted clause (a) (v) of section 40 shall have to be seen which reads as under :
“Section 40(a)(v). – Any expenditure incurred after 29th day of February, 1964, which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to an employee (including any sum paid by the company in respect of any obligation which but for such payment would have been payable by such employee), to the extent such expenditure exceeds one-fifth of the amount of salary payable to the employee for any period of his employment after the aforesaid date :
Provided that in computing the aforesaid expenditure any payment by way of gratuity or the value of any travel concession or assistance referred to in clause (5) of section 10 or passage moneys or the value of any free or concessional passage referred to in sub-clause (i) or any payment of tax referred to in sub-clause (vii) of clause (6) of that section or any sum referred to in clause (vii) of subsection (1) of section 17 or in clause (v) of sub-section (2) of that section or the amount of any compensation referred to in clause (i) or any payment referred to in clause (ii) of sub-section (3) of that section or any payment referred to in clause (iv) or clause (v) or any expenditure referred to in clause (iv) or clause (v) or any expenditure referred to in clause (ix) of sub-section (1) of section 36 shall not be taken into account :
Provided further that nothing in this sub-clause shall apply to any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite to an employee whose income chargeable under the head ‘Salaries’ is seven thousand five hundred rupees or less.”
It may be noted that, in the amendment which was effected by the amendment of fineness Act, 1964, the word “remuneration” was dropped from the relevant phase giving an indication that the Legislature did not intend to include cash emoluments in any of the words “benefit, amenity or perquisite”. Secondly, by the said amendment of 1964, the Legislature also added the words “whether convertible into money or not”. Thirdly, it is also pertinent to not that in sub-clause (i) of the said clause (c) of section 40, the word “remuneration” was retained along with the other words “benefit or amenity” even after aforesaid amendment of sub-clause (iii). This has also manifested that the Legislature was conscious of the distinction between the relevant words and keeping in mind the said distinction, the Legislature has deliberately chosen to delete the expression “remuneration” from sub-clause (iii).
In the case of CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 199 ITR 431, a Division Bench of the Calcutta High Court was called upon the decide the question as to whether the assessee-company which had been carrying on business in cultivation, manufacture and sale of tea was entitled of deduction, inter alia, of the amounts paid as “overseas allowance”, “managing allowance”. “devaluation allowance” and “transportation allowance” to some of its employees in the computation of its business profits and income on the ground that these items did not represent any benefit or amenity or perquisite within the meaning of section 40(c)(iii) of the Income-tax Act, 1961, and were, therefore, fully deductible. The Division Bench held that the aforesaid amounts paid to the employees of the company did not fall within the expressions “benefit” “amenity” or “perquisite” with in the meaning of section 40(c)(iii) and were deductible in computing the business profit of the company. The Division Bench observed as under (at page 437) :
“In our view, in their ordinary meaning, the words ‘which results directly or indirectly in the provision of any benefit or amenity or perquisite whether convertible into moneys or not’ in clause (c) (iii) of section 40 excludes cash paid directly to an employee as there is no question of convertibility to money where cash would be paid. This interpretation is reinforced by the fact that originally the said sub-section contained the expression ‘remuneration’ which was specifically excluded by the amendment introduced in 1964 which also introduced the clause ‘whether convertible into money or not’.
In sub-clause (i) of the said clause (c) the expression ‘remuneration was retained along with the other expressions ‘benefit’ and ‘amenity’ even after amendment. This would show that the Legislature had in view the distinction between the said expressions and yet choose to delete the expression ‘remuneration’ from the said clause (iii).
The phase ‘whether convertible into money or not’ in our opinion does not govern only the expression ‘perquisite’. The words in the section are ‘any benefit or amenity or perquisite’. If the phase ‘whether convertible into money or not’ was intended to govern only the word ‘perquisite’ then the correct grammatical form would have been ‘any benefit or amenity or any perquisite, whether convertible into money or not’.”
Similarly, in the case of CIT v. Mysore Commercial union Ltd. [1980] 126 ITR 340, the Division Bench of the Karnataka High Court was called upon to decide an identical question under section 40(a)(v) in connection with the payment of bonus in cash to the employees. The Division Bench of the Karnataka High Court observed as under (at page 343) :
“In our opinion, for a proper interpretation of the provision in section 40(a)(v), weight has to be given to the expression ‘whether convertible into money or not’ which implies that the benefit or amenity or perquisite spoken of in the section is something apart from money such as something in kind, which may be convertible into money or not. The expression ‘whether convertible into money or not’ would not at all be appropriate when one considers a payment in cash. Therefore, the view taken by the Tribunal that the amount paid by way of bonus was not a perquisite and, therefore, could not be taken into account in making disallowance in the basis of the restriction to be applied at one-fifth of the salary is correct.”
In the case of CIT v. Manjushree Plantations Ltd. [1980] 125 ITR 150, the Madras High Court, speaking through Justice v. Ramaswami (as he then was), was called upon to decide the question as to whether the payments made to he employees representing leave allowance were deductible or not The High Court found that the matter was not res integra and it was covered by the decision of the Calcutta High Court in the case of Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431. Following the aforesaid judgment, the court held that any cash payment directly made to the employee cannot be considered to be a “perquisite” within the meaning of section 40(a)(iii) or the corresponding later provision of section 40(a)(v). The court held that, in order to term a payment as “perquisite”, it shall be a payment other than a cash payment in pursuance of a contract of service. The court, therefore, answered the question in favour of the assessee.
In the case of CIT v. Indokem Pvt. Ltd. [1981] 132 ITR 125, the Division Bench of the Bombay High Court was called upon to decide the question as to whether the amount paid by way of bonus and commission in cash by the company to its employees was a perquisite or not, and it can be deductible as revenue expenditure in computing the income under the head “Profits and gains of business”. Justice P. B. Sawant (as he then was) examined the aforesaid two provisions in great detail and held that, by the amendment of the Finance Act, 1964, the word “remuneration” was dropped from the relevant phase giving an indication that the Legislature did not intend to include cash emoluments in any of the words “benefit, amenity or perquisite”. It is also clear from the fact that, by the said amendment, the Legislature also added the words “whether convertible into money or not”. If the Legislature had intended to include any of words “benefit”, “amenity” and “perquisite” paid in cash to the employees, the question of cash being convertible into money or not would not arise. The court, therefore, found that this was another pointer that the Legislature has no intention to include cash or money paid directly to the employees in the said sub-clause. The court also fund that there was a further indication of the intention of the Legislature and that was the fact that in sub-clause (i) of clause (c) of section 40, the word “remuneration” was retained along with the other words “benefit, amenity or perquisite” even after the aforesaid amendment of sub-clause (iii). It is also further shown that the Legislature was conscious of the distinction between the relevant words and, keeping in mind the said distinction, the Legislature had deliberately chosen to delete the expression “remuneration” from sub-clause (iii). Based on all those factors, the Division bench held that the expression “any benefit, amenity or perquisite” or “whether convertible into money or not” used in sub-clause (iii) was not intended to included wash or money paid directly to the employee. It may be stated that a similar view is also taken by the Andhra Pradesh High Court in the case of CIT v. Vazir Sultan Tobacco Co. Ltd. [1988] 169 ITR 324 and in another case i.e., CIT v. Kores India Pvt. Ltd. [1989] 176 ITR 500, the Bombay High Court also taken a similar view.
A Division Bench of this High Court has also, in the Case of CIT v. Alchemic Pvt. Ltd. [1981] 130 ITR 168, construed section 28(iv) and observed as under (headnote) :
“The assessee which was served with a notice for payment of excise duty paid it and recovered Rs. 15,964 towards payment of excise duty from its constituents. The assessee contended before the excise authorities that duty was payable by it and obtained a refund of Rs. 15,964 from them in the calendar year 1970, relevant to the assessment year 1971-72. The assessee credited this amount to its profit and loss account and claimed it as exempt on the ground that it was a casual receipt. This contention was rejected by the Income-tax Officer, but the Appellate Assistant Commissioner accepted the assessee’s claim. On further appeal, it was contended on behalf of the Revenue that the amount was taxable under section 28(iv) or, in the alternative, it was covered by section 41(1).”
Dealing with the aforesaid question, the Division Bench of this court to which one of us, namely, S. B. Majmudar J. was a party, observed as under (at page 173) :
“So far as the question of section 28(iv) of the Act is concerned, section 28(iv) provides that that income falling under clause (iv) of section 28 shall be chargeable to income-tax under the head ‘profits and gains of business professions’. Clause (iv) provides :
‘the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.’
It is obvious that if what is received either by way of benefit or perquisite is money, there is no question of considering the value of such monetary benefit or perquisite under the head ‘Profits and gains of business of profession’s. It is only if the benefit or the perquisite in not cash or money but is non-monetary benefit or non-monetary perquisite perquisite that the question of including the value of such benefit or perquisite would ever arise. Under these circumstances, the Tribunal was right in rejecting the contention urged on behalf of the Revenue that the amount of Rs. 15,964 should be brought to tax as value of any benefit or perquisite within the meaning of section 28(iv). The Tribunal doubted whether the amount of Rs. 15,964 should was any benefit – ‘It may or may not be a benefit’s. Another question is whether the phase ‘whether convertible into money or not’ would normally mean something eye than money. In our opinion, the conclusion of the Tribunal that section 28(iv) can never be made applicable to the facts of the present case, where excise refund was received by the assessee.”
It thus becomes clear that the preponderance of judicial view of the courts in India is in favour of the proposition that use of the words “whether convertible into money or not” confine or restrict the application of section 40(c)(iii) or section 40(a)(v) to cases of distribution or payments in kind and not in cash. The provision dealing with the amounts deductible in computing the income from business that the benefit, amenity or perquisite spoken of in the section is something apart from money such as something in kind which may be convertible into money or not. The expression “whether convertible into money or not. The expression “whether convertible into money or not” would not be appropriate when one considers a payment in cash. Consistent with the preponderance of the aforesaid judicial view, we are of the opinion that the payment of benefits to employees in cash is not a perquisite either under section 40(c)(iii) or under section 40(a)(v), therefore, the same cannot be disallowed in part or in full.
Mr. B. J. Shelat, learned counsel appearing for the Revenue, has, however, strongly relied upon the decision of the full Bench of the Kerala High Court in the case of CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 19. There, one of the employees of the assessee-company was allowed only house rent allowance of Rs. 1,800. The Income-tax Officer treated this as a perquisite allowed to the employee since his salary per years was Rs. 11,400. This employee was also allowed a sum of Rs. 840 as servant’s salary and fuel and lighting expenses reimbursement of Rs. 900. The total of the aforesaid allowances was Rs. 3,540 and the same were treated as perquisites by the Income-tax Officer. The claim of the assessee-company was that aforesaid amount was deductible. The Full Bench of the Kerala High court referred to section 40(a)(v) and held that the amount mentioned in the various clauses of section 40 were not deductible for computing income chargeable under the head “Profits and gains of business or profession”. The full Bench referred to Explanation 2 which provided that the word “salary” shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the fourth Schedule reads as under :
“(h) ‘salary’ includes dearness allowance, if the term of employment so provide, but excludes all other allowances and perquisites.”
The Full Bench of the Kerala High Court took the view that salary would include dearness allowance, if the terms of employment so provide, and that it would exclude all other allowances and perquisites. According to the Full Bench, this gave a clear concept of what is “salary” for the purpose of section 40(a)(v). The court, therefore, took the view that, when this very clause uses the term “salary”, it is to be understood as excluding all allowances and perquisites other than dearness allowance. The court observed as under (at page 27 of 135 ITR.) :
“We find that the sub-clause uses the term ‘benefit, amenity or perquisite’ as opposed to salary evidently inducting that these together will exhaust what an employee obtain in return for his service. Evidently the object of section 40(a)(v) is to persuade the employer to set a limit on the extent of the benefits of any kind that could be extended to any employee by an explore. Of course any employer is free to provide his employee with the salary agreed upon and also allowances, perquisites and such amenities as the parties may choose to stipulate by way of terms of employment. Though these will be expenses falling within section 37(1) of the Income-tax Act as expenditure incurred wholly for the purpose of the business, the employer’s claim for deduction is subject to the limit specified in section 40(a)(v). This is so in order that the taxable profits may not be siphoned off. If the benefit, amenity or perquisite exceeds one-fifth of the salary or Rs. 1,000 per monism, whichever is less such excess over the one-fifth would not be treated as deductible expenditure with the result that despite such payment the assessee will have to pay tax on it. That will effectively deter an assessee from paying anything in excess of one-fifth of the salary by way of benefit, perquisites and amenities, the object being that it is not possible to conceive any category of benefit – the term ‘benefit’ is used in a wider sense-accruing to an employee other than the salary outside the scope of the term ‘benefit, amenity or perquisite’. It is evident that the enumeration of benefit, amenity and perquisite is intended to cover exhaustively all that an employee may get in any form other than the salary outside the scope of the term ‘benefit, amenity or perquisite’. It is evident that the enumeration of benefit, amenity and perquisite is intended to cover exhaustively all that an employee may get in any form other than his salary. In other words, between salary on the one hand and benefit, amenity or perquisite on the other whatever an employee would get from his employer cash kind or services must stand exhausted.”
However, when confronted with the question as to what meaning should be given to the words “whether convertible into money or not which immediately follow after the use of the words “benefit, amenity, amenity or perquisite”, the Full Bench found that undue emphasis should not be given to the words “whether convertible into money or not”. In this connection, the Full Bench observed as under (at page 28 of 135 ITR) :
“We do not see any reason to give undue emphasis to the words ‘whether convertible into money or not’ so as to give a very restricted meaning to the term ‘Benefit, amenity or perquisite’, a meaning which would not serve the evident purpose of the section. We say so because that would mean that any cash allowance paid by the employer to an employee of any sum whatsoever will be entitled to deduction despite section 40(a)(v) because restriction is limited only to non-cash advantage given to the employee. Such a construction appears to us to be quite irrational defeating the very purpose of prescribing the limit under section 40(a)(v) so auto dissuade an employer from paying unduly large sums by way of benefit, amenity or perquisite. The statute itself lays down the permissible limit of deduction in respect of salary and that would be incomplete unless a permissible limit of deduction is laid down in respect of other benefits that are extended to an employee. Though the words ‘whether convertible into money or not’ may at first sight appear to indicate that whatever are not convertible into money stand excluded from the scope of the term ‘benefit, amenity or perquisite’, that need not necessarily be so. The term ‘benefit, amenity or perquisite’ may take in any benefits in kind and in service and may take in also cash. ‘Whether convertible into money or not’ need not qualify the whole range. It only means that it is immaterial whether the benefit, perquisite or amenity may or may not be convertible into money. That would be immaterial. According to us, this would be the proper reading of the section.”
Having given our anxious consideration to the view expressed by the Full Bench of the Kerala High Court, the same does not commend to us firstly because the said decision does not give the proper meaning to the expression “whether convertible into money or not” and tries to explain the use of the said phase by the Legislature as immaterial. We are of the opinion that, when the Legislature has used the words “whether convertible into money or not” immediately following the words “benefit, amenity or perquisite”, it has purposively used the phrase so as to see that amounts spent towards benefit, amenity or perquisite when the same is offered in kind and not in cash shall not be deducted in computing the income chargeable under the head “Profit and gains of business or profession”. In order to term the payment as a “perquisite”, it has to be a payment other than cash payment in pursuance of a contract of service. Secondly, in our opinion, it would not be correct to say that to permit an employ to give to his employees other allowances and perquisites is to permit his to siphon away the taxable profits. Thirdly, the full bench of Kerala High Court was not right in interpreting Explanation 2 to the said section and in treating the definition of salary as given by rule 2 (h) as an exhaustive definition. In fact, rule (h) simply an inclusive definition and it does not make an attempt to define “salary”. The word “salary”, in its widest coverage, would definitely include all those payments of bonus is consistently taken to be part of salary by preponderance of judicial opinion. Unfortunately, the Full Bench of the Kerala High Court has treated the definition of “salary” as given by rule (h) as an exhaustive definition. The propose of the said definition is to include the dearness allowance, if the terms of employment so provide. We also cannot subscribe to the views expressed the Full Bench of the Kerala High Court in the case of CIT v. Common wealth Trust Ltd. [1982] 135 ITR 19 because, in our opinion, the term “salary” occurring in section 40(c)(iii) could not be construed in a restricted or unrealistic manner. All the payments or allowances such as bonus, commission and special allowance given to the employees for work don by them are in appreciation of good work done by them which had bought profit and prosperity to the employer concerned and aimed at inducing them to do such good work in future is includible within the scope of “salary” payable to the employee. In the context of section 36(1)(ii) of the Income-tax Act in the case of Shahzada Nand and Sons v. CIT [1977] 108 ITR 358 (SC), Justice P. N. Bhagwati (as he then was) speaking on behalf of the three-judge Bench of the Supreme Court, observed that the said section does not postulate that there should be any extra service rendered by an employee before payment of commission to him can be justified as an allowable expenditure. In the said case, annual commission was paid to two employees who were looking after the business and were directly responsible for the increase in prosperity of the company. The court, in the said context, was require to consider as to whether such payment was unreasonable. Having noticed that there was no obligation on the part of the employer (assessee) to make payment of this commission and that the combustion was paid ex grater, the court found that such payment cannot be regarded as unreasonable. The court further observed as under (at page 366) :
“Commercial expediency does not mean that an employer should not make any payment to an employee unless the employee is entitled to it under a contract. Even where there is no contract, an employer may pay commission to an employee if he thinks that it would be in the interest of his business to do so. It is obvious that no business can prosper unless the employees engaged in it are satisfied and contended and they feel a sense of involvement and identification and this can be best secured by giving them a stake in the business and allowing them to share in the profits. It would indeed be a wise step on the part of an employer to offer incentives to his employees by sharing a part of his profit with them. This would not only be good business but also good ethics. It would be in consonance with the Gandhian concept as also modern socialistic thought which, with its deeply rooted faith in social and economic democracy, regards the employees as much as the employer as co-shares in the business. If an employer earns profits to which the employees have necessarily contribute by putting in their labour, there is no reason why the employer should not share a part of these profits with the employees. That is the demand of social justice today and it is high time that the administration of our tax law recognised it and encouraged sharing of profits by employer with the employees by adopting progressive and liberal approach in the applicability of section 36, sub-section (1), clause (ii).”
The aforesaid observations make it apply clear that an employer who distributes its profit by paying bonus or commission to his employees cannot be charged with siphoning away his income as is done by the Full bench of the Kerala High Court and, in our opinion, the reasoning that has found favour with the honourable judges of the Full Bench of the Kerala High court run quite counter to the reasoning of the Supreme Court of India in the aforesaid case.
For the aforesaid reasons, we cannot persuade ourselves to agree with the view taken by the Full bench of the Kerala High Court as opposed to the view taken by various other High Courts including our own High Court.
Before parting with these questions, we would like to note two alternative submission made by Mr. D. A. Mehta, learned counsel appearing for the assessee, in support of the claim of the assessee for inclusion of the amount if bonus in salary. His first alternative submission is that the term “salary” as occurring in section 40(c)(iii) would take within its sweep the payment of bonus. He has submitted the, under section 40(c)(iii), though by Explanation 2 it is provided that the word “salary” shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule, and though the word “salary” is defined in rule 2 (h) to include the dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites by submitting that specific exclusion of bonus from the definition of “salary” or “wages” would signify that, but for such exclusion, bonus would fall under the words “salary and wages”. In this connection, he has referred to and relied upon the decision of the Madras High Court in the case of CIT v. India Radiators Ltd. [1976] 105 ITR 680.
We have not considered this alternative submission in further detail and have not decided the correctness or other wise of the said submission became on the very first submission, we have agreed with Mr. D. A. Mehta and not agreed with Mr. B. J. Shelat, learned counsel for Revenue, and, therefore, it is not necessary to decide this alternative submission.
The second alternative submission of Mr. Mehta, learned counsel for the assessee, was to the effect that, for the assessment years 1969-70 to 1971-72, the bonus paid to the employees even if taken as falling within the first part of section 40(a)(v) would be governed by the proviso which excludes certain expenditure like computing expenditure under the first part of section 40(a)(v). The clause which would apply to bonus would be clause (g) of the proviso. This clause excludes payment referred to in sub-clause (ii) of clues (3) of section 17. Section 17(1) gives an inclusive definition of word “salary”. It, apart from other items included in section 17(1)(iv), includes any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages. The words “profits in lieu of salary” has been defined in section 17(3) and section 17(3)(ii) provides for any payment due to or received by an assessee from an employer. It is, therefore, submitted that the words “profits in lieu of salary” have been given a very wide meaning by section 17(3)(ii) which includes any payment received by an employee from his employer. Therefore, Mr. Mehta submitted that profit bonus is payment made by the employer to its employees where a company earns profits in a particular year. Such payment is expressly excluded by clause (g) of the proviso to section 40(a)(v) for computing the expenditure. He, therefore, submitted that once profit bonus is excluded for computing expenditure for the purpose of section 40(a)(v), the question of its disallowability does not arise and, in support of his submission, he has relied upon the decision of the Allahabad High Court in the of CIT v. Hind Lamps Ltd. [1980] 122 ITR 451. The aforesaid alternative submission also prima facie supports the assessee, but, in view of our earlier discussion, it is not necessary for us to decide this alternative submission also.
In the result, we are of the opinion that the Tribunal was right in holding that the payments made by the assessee to its employees each drawing more than Rs. 7,500 did not amount to benefit, amenity or perquisite within the meaning of section 40(c)(iii) for the assessment year 1968-69 and within the meaning of section 40(a)(v) for the assessment year 1969-70 to 1971-72. We, accordingly, answer question Nos. 1 and 3 in the affirmative, i.e., in favour of the assessee and against the Revenue.
Answer to question No. 2 :
This question arises for our consideration because the Income-tax Officer has excluded the loan of Rs. 25 lakhs while computing the relief under section 80J of the Income-tax Act, 1961. He excluded the said amount taken by assessee from the bank on the ground that it was repayable within seven years, and, therefore, the condition set out in rule 19A (3) (b) was not satisfied. It may be mentioned here that the Income-tax Officer made a computation of the capital for the purpose of relief under section 80J on Rs. 1,34,65,521, and he further deducted the amount of Rs. 25 lakhs therefrom by holding that the said term loan from the bank provided under the agreement for repayment during the period of less than years, and, therefore, the conditions laid down under rule 19A (3) (b) were not satisfied. He, therefore, valued the capital at Rs. 1,09,65,521 and granted 6 per cent. Thereof as capital computation from the relief under section 80J. The Appellate Assistant Commissioner has confirmed the view taken by the Income-tax Officer.
At this stage, we may mention that the question whether the loan was repayable within seven years or not under the agreement between the bank and the assessee is concluded by the decision of the Division Bench of this court in the case of this very assessee, i.e., New India Industries Ltd. v. CIT [1977] 108 ITR 181. However. We may also mention that the Division be of this court in the aforesaid cease was not concerned with rule 19A (3) (b) but it was required to examine the question whether, under the provisions of the Companies (Profit) Surtax Act, 1964, in computing the capital employed for the purpose of surtax under the Act, money borrowed by the company from the bank were includible in the total amount of capital in accordance with the rules for computing the capital of a company. Rule 1, in so far as material, is reproduced herein :
“1. Subject to the other provisions contained in this Schedule, the capital of the company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of,….
(v) any money borrowed by it from Government or the Industrial Finance Corporation of India or the industrial Credit and Investment Corporation of India or any other financial institution which the Central Government may notify in this behalf in the Official Gazette or any banking institution (not being a financial institution notified as aforesaid) or any person in a country outside India :
Provided that such moneys are borrowed for the creation of a capital asset in India and the agreement under which such movies are borrowed provides for the repayment thereof during a period of not less than seven years.”
The aforesaid provisions of the rule before the Division Bench are required to be juxtaposed with the provisions of rule 19A (3) (b) and the same is reproduced herein :
“19A. (3) (b) in the case of any assessee (including a company), any moneys borrowed from an approved source for the creation of a capital asset in India, if the agreement under which such money are borrowed provides for the repayment thereof during a period of not less than seven years.
Explanation. For the purpose of this sub-rule, –
(i) ‘approved source’ means the Government or the Industrial Finance Corporation of Indian or the Industrial Credit and Investment Corporation of India Ltd. or any banking institution or any person in a country outside India or any one the following financial institutions, namely :-
(a) a State Financial Corporation established under the State Financial Corporations Act, 1951 (63 of 1951);
(b) the Industrial Development Bank of India, established under the Industrial Development Bank of India Act, 1964 (19 of 1964);
(c) the Madras Industrial and Investment Corporation of India Ltd. ;
(d) the Re-finance Corporation for Industry Ltd. :
(e) the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956).”
Going through the provisions of the rule before us and the provision of the rule before the Division Bench in the case of New India Industries Ltd. [1977] 108 Itr 181 there is no manner of doubt that the lingua of the two provision is in pari materia. If the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than seven years the amounts of the loan or the amount borrowed is required to be excluded while computing the capital of the company. Obviously, therefore, the question which would arise for our consideration would be as to whether the terms of the agreement under which the assessee-company took the loan from the bank stipulated repayment of the loan within a period of not less than seven years. In our opinion, since the question in answered by the Division Bench of this court in the case of this very assessee by construing the very agreement and by reference to the correspondence between the assessee and the bank, the Tribunal was right in following the said decision and in holding that the loan taken by the assessee-company from the bank qualified for inclusion in the computation of its capital for the purposes of section 80J.
Mr. D. A. Mehta, appearing for the Assessee, has also invited our attention to the decision in the case of Lohia machines Ltd. v. Union of India [1985] 152 ITR 308 (SC). In our opinion, it is not necessary for us to refer to the said decision in extension because the question is no longer res integra and is concluded by the decision of a Division Bench of this court in the case of the very assessee-company, and, therefore, in our opinion, the Tribunal was right in holding that the agreement between the bank and the assessee provided for the repayment of the money during a period of not less than seven years. We, accordingly, answer the second question in the affirmative, i.e., in favour of the assessee and against the Revenue.
Answer to question No. 4 :
It appears that, for the assessment year 1970-71 and 1971-72, the assessee had claimed deduction of expenditure amounting to Rs. 1,200. According to the assessee, the same amount was spent by the assessee towards listing fees paid by the assessee to the stock exchange to get its shares listed. The Tribunal also, while agreeing with the Appellate Assistant Commissioner as well as the Income-tax Officer found that this amount spent by the assessee cannot be said to have been spent by the assessee for its business. The listing fees paid by the assessee were not paid by assessee wholly and exclusively for the purpose of its business. The Tribunal, therefore, took the view that deduction of the said expenditure cannot be allowed.
Mr. D. A. Mehta submitted that the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal have failed to refer to the Circular F. No. 10/67/65.IT (A-1) dated August 26, 1965, issued by the Central Board of Direct Taxes. According to him, the said circular would squarely govern the field circular read as under :
“Annual listing fees paid to a stock exchange. – Attention is invited to Board’s letter [F. No. 10/44/64/IT(A-1)] dated January 14, 1965, on the above subject. The matter has been reconsidered by the Board. As the advantage accruing to a company as a result of getting its shares listed on a stock exchange contain substantial advantages by the Board. As the advantages accruing to a company as a result of getting its shares listed on a stock exchange contain substantial advantage pertaining to its day-to-day business, it has been decided that such expenses should be considered as laid but wholly and exclusively for the purposes of the business and, therefore, admissible as business expenditure under section 37(1). In view of the above, the instructions issued under Board’s earlier letter referred to above may be treated as withdrawn.
(F. No. 10/67-65 IT(A-1), Dated 26-8-1965).”
However, we find that this circular, though in existence, was not brought the notice of the Income-tax Officer and the Appellate Assistant Commissioner or the Tribunal. The same was relevant to the determination of the question. We are, there, of the opinion that, had this circular been brought to the notice of the Tribunal, it would have direct the Income-tax Officer to examine the question afresh and redetermine the same in the light of that circular. Since this circular was not brought to the notice of the Tribunal or to the notice of the lower authorities, we are of the view that we should not answer this question and, accordingly, we decline to answer the question referred to us as was done by the Karnataka High Court in the case of Motor Industries Co. Ltd. v. CIT [1987] 163 ITR 659.
Answer to questions Nos. 5 and 6 :
The aforesaid questions Nos. 5 and 6 referred by the Tribunal for our opinion are already reproduced hereinabove. However, during the course of submissions of learned counsel for both the parties, i.e., for the assessee and the Revenue, we found that question No. 6 is no correctly framed and the same shall have to be reformed as under :
“If the answer to question No. 5 is in the affirmative, whether the Tribunal was correct in law in invoking the provisions of section 32(1) read with section 38(2) of the Income-tax Act, while holding that, although the factory building was a business asset, no depreciation was allowable on the same in view of the character of its use ?”
Having so framed question No. 6, we now proceed to consider the said two questions.
These two questions relate to entitlement of the assessee to depreciation on factory building for the assessment year 1970-71 and 1971-72. The assessee-company had let out a building known as building No. 2 which was a single-strayed, steel framed structure with plastered cement walls, steel doors and roof of asbestos cement sheets to M/s. Agfa Gevaert India Ltd. on a monthly rent of Rs. 3,500 in assessment year 1970-71 and Rs. 2,500 in the assessment year 1971-72. The annual rent of the said building came to Rs. 42,000 in the assessment year 1971-72. It appears that the assessee had claimed depreciation on all its factory building including the building or portion of the building let out to M/s. Agfa Gevaert India Ltd., the Income-tax Officer was, however of the view that the assessee was not entitled to depreciation on the building or portion of the building let out M/s. Agfa Gevaert India Ltd. He estimated the value of the building let out at Rs. 4,00,000 and distilled depreciation at 5 per cent. thereon. Thus the disallowance of depreciation worked out to Rs. 20,000 for the assessment year 1970-71 and Rs. 19,000 for the assessment year 1971-72.
In the appeal preferred by the assessee, the Appellate Assistant Commissioner held that building let out was used by the assessee-company ordinarily for its manufacturing activities and that flatting out was only for a temporary period and the company had given the premises on rent to M/s. Agfa Gevaert India Ltd. Who were its distributors. The Appellate Assistant Commissioner, therefore, held that the building was a business asset of the assessee-company and since it was given on rent temporarily, the income by way of rent would not fall under the head “House property” but it would fall under the head “Profits and gains of business or profession”. He, therefore, held that the depreciation on the said amount of rent was admissible and that the Income-tax Officer was not justified in disallowing such depreciation.
In Further appeal to the Tribunal by the Revenue, the Tribunal took the view that the income of rent from the building let out to M/s. Agfa Gevaert India Ltd. was taxable under the head “Income from house property”, and that the Appellate Assistant Commissioner was not right in holding that such rental income was income from “Profits and gains of business or profession”.
In the aforesaid fact-situation, we are required to decide as to whether the Tribunal was right in holding that the rental income accruing to the assessee during the relevant assessment year from renting out part of its business premises can be said to be income under the head “Income from house property” or it can be said to be income from “Profits and gains of business or profession”.
Chapter IV Income-tax Act, 1961, deal with computation of total income. Section 14 prescribed heads of income being :
(A) Salaries,
(B) Interest on securities,
(C) Income from house property,
(D) Profits and gains of business of profession,
(E) Capital gains, and
(F) Income from other sources.
In the present case, it shall have to be ascertained as to whether the rental income accruing from renting out part of the business asset can be said to be income from house property or income from “Profits and gains of business or profession”. Section 22 deals with “income from house property”. It provides that the only value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax shall be chargeable to income-tax under the head “Income from house property.” It is clear from this provision that that portion of building or land of which the assessee is the owner and the portion of the property which is not occupied by the assessee for the purpose of his business or profession shall be chargeable to income-tax under the head “Income from house property”. Section 28 provides that various income enumerated therein from clauses (i) to (iv) shall be chargeable to income-tax under the head “Profits and gains of business of profession”. Section 32 of the Act, inter alia, provides for depreciation of buildings, machinery, plant or furniture owned by assessee and used for the purchases of the business or profession. Section 38, inter alia, provides for situation when any building, machinery, plant or furniture is partly used for business or not exclusively so used. Sub-section (2) of section 38 being material is reproduced herein :
“38 (2) Where any building, machinery, plant or furniture is not exclusively used for the purposes of the business or profession, the deductions under sub-clause (ii) of clause (a) and clause (c) of section 30, clause (i) and (ii) of section 31 and clauses (i), (ii) and (iii) of sub-section (1) and sub-section (1A) of section 32 shall be restricted to a fair proportionate part thereof which the Income-tax officer may determine, having regard to the user of such building, machinery, plant or furniture for the purpose of the business or profession.”
Having seen the position of the statutory provisions which would be relevant for the purpose of determining the aforesaid two questions, we may briefly mention the submissions of Mr. D. A. Mehta, learned counsel for the assessee. He strenuously submitted before us that, in the present case, the assessee has not let out the entire factory premises or building and, admittedly part of it was let out. He further submitted that the said letting out was admittedly, for a temporary period and through, at the time when the said portion was leased out, the assessee-company has ceased to work, the assets in question continues to remain business assets, and income arising by leasing out the said business assets would retain the character of business income and it could not have been treated as “income from house property”. In other words, in his submission, when there is complete cessation of business and when there is temporary hiring out of business assets by the assessee, like a prudent businessman, with a view to minimise losses, the income from the said hiring out retains the character of “business income”.
The law on the subject is stated clearly and succinctly by the Supreme Court in the case of CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451. The assessee-company before the Supreme Court was a manufacturer of silk cloth and as a part of its business it installed a plant for dyeing silk yarn. During the chargeable accounting period, i.e., January 1, 1943, to December 31, 1943, owing to difficulties in obtaining silk year on account of the war it could not make use of this plant and it remained idle for some time. In August, 1943, the plant was let out to a person on a monthly rent. The question was whether the sum representing the rent for five months realised by the assessee was chargeable to excess profits tax as profits of business or was income from other sources and not chargeable to excess profits tax. It was in the context of these facts that the Supreme Court was called upon to decide as to under which head the income would fall.
The Supreme Court firstly found that no general principle could be laid down which is applicable to all cases and each case has to be decided on its own circumstances. The court noticed that the decisions of the English courts courts are not always helpful in dealing with matters arising under Indian laws.
The court seconds found that, if an assessee’s daily income from a commercial asset which is capable of being used as a commercial asset, then it is income from his business, whether he uses that commercial asset himself or lets it out to somebody else to be used. The asset would not cease to be a commercial asset simply because temporarily it was put out of use or it was let out to another person for his use.
The court thirdly found that, so long as the commercial asset is capable of being explodes as such, its income is business income irrespective of the manner in which the asset in exploited by the owner of the business he is entitled to exploit it to his best advantage and he may do so with by using it himself personally or by letting it out to somebody else.
Fourthly, the court noticed that if the commercial asset is not capable of being used as such or as a commercial asset, then its being let out to others does not result in accrual of business income.
The court, however, noticed that, if the asset was not pure and simple commercial asset like plant or machinery, etc., but it was an asset in the nature of land and building simpliciter, different considerations would apply. Cases of individuals or companies acquiring lands or buildings and making income by letting them on hire would legitimately fall under the specific provision of section 9 of the old Act, equivalent to section 22 of the Act of 1961, i.e., “income from house property”. The case of an owner of landing letter out his land and carrying out exploitation of part of that land by selling gravel out of it, would fall under section 22 of the Act of 1961, as income earned from land or house property. When the asset is in the nature of land or building capable of being used for any other purpose and when the assessee ceases to use it as a commercial asset either himself or even through others the income derived by him by renting out the same would more appropriately fall under the head “Income from house property” as, like any other owner of property, he gets income from that property as owner. In such cases, it is not the factotum of his business or commercial activity which brings income to him but it is his investment in property or his ownership of property which brings income to him. In such cases, the leasing of property itself is the activity. It is leased with a view to produce income, a transaction quite apart from the ordinary a view to produce income, a trisection quite apart from the ordinary business activities of the company.
A clear distinction is made so far as letting out of an asset as land or building is concerned and letter out of plant or machinery. If plant or machinery or other assets of the assessee-company are lying idle and if they are used or permitted to be used be someone by hiring them out with a view to covering the loss of the assessee, it was held that the income derived from such rental was “rental income”. However, when a building or part of the factory or part of the land which were once held as a business asses by the assessee are leased out to a third party for the purpose of business of such third party, the transaction which is effected purely to produce income or a transaction apart from the business activities of the assessee-company, cannot be said to be bringing business income.
In the case of CIT v. National Mills Co. Ltd. [1958] 34 ITR 155, a Division Bench of the Bombay High Court, speaking through the then Chief Justice, Mr. M. C. Chagla, was concerned with a company which was carrying on the business of manufacturing textiles. The company got into financial difficulties and stopped manufacturing textiles. Thereafter, the liquidator let the plant and machinery of the company on a monthly rent for a period of three years. The lessees had an option to renew the lease for a further period of three years and had a further option to purchase the plant and machinery at a price fixed on the expire of the lease. The question was as to how the income derived by the company from letting out the plant and machinery during the account year relevant to the assessment years 1951-52 and 1952-53 should be treated. The Tribunal treated the said income as derived from business. On a reference to the High Court, the High Court made the following observations (at page 159) :
“An assessee carrying on business utilizes certain assets as business or commercial assets. With the help of these assets the assessee carried on its business and makes profits. There is another way by which the assessee may also make profits out of these assets and carry on the same identical business. Even in such a case, the activity of the assessee would be a business activity. It would be carrying on the same business through a different instrumentality. It is not necessary that in order that the income of the assessee should be business income, it should be produced by the assessee utilising the business assets itself. So long as those assets are used as business assets, it is irrelevant whether the business assets are exploited and used by the assessee itself of someone else. It is true the you have a different situation under certain circumstances. The assessee may stop doing business all together and these assets may cease to have the character of business or commercial assets. Then, they take on an entirely different character. They become capital assets, and quo those assets the assessee is not carrying on any business, but quo those assets the assessee has become their owner. As an owner the assessee may also exploit those assets and receive income. But the income which it receives is no long business income because no business is being carried on and the assets are not business assets. In such case, the income would be an income derived by the owner from his capital assets, and the head of income under which such income would fall for the purpose of the Income tax Act would be section 12 and not section 10. Whether a business is carried on or not and whether assets of an assessee are business assets or not are question of fact, and they must be decided by Tribunal on the evidence led before it.”
From the aforesaid observations, one further proposition emerges and its is that, in order that the income of the assess should be business income, it is not necessary that income should be produced by the assessee utilising the business assets itself. So long as those assets are used of business assets, it is irrelevant whether the business assets are exploited and used by the assessee itself or by some else.
One additional proposition which emerges from the aforesaid observation is already underlined while quoting the observations of the Division Bench and it can be said that, when the assessee had stopped doing business altogether and when the asset ceases to have the character of a business or commercial asset, it become a capital asset. Qua such asset the assessee is not carrying on any business, though as the owner of the asset, he may exploit such asset but, in such circumstances, income which he receives is no longer business, but income from property owned by him and hence “income from house property”.
In the case of G. R. Narasimier and Co. v. CIT [1969] 73 ITR 257, a Division Bench of the Madras High Court was called upon to decide the question as to whether the income derived by the assessee from leasing out the powerlooms can be said to be business income or income from other sources. After considering various clauses of the agreement, the court found that the intention of the parties as expressed in the documents was to create a relationship of principal and agent in relation to the working of the powerlooms and that it was not a document of lease, and, therefore, the income was assessable from business. In our opinion, the facts of the said case are quite different and the case is decided more or less on the peculiar facts and circumstances prevailing in that case and is not relevant for the purpose of deciding the controversy before us. In the case of CIT v. Ajmera Industries Pvt. Ltd. [1976] 103 ITR 245 (Cal). The assessee was formed with the main object of manufacturing pipes. The manufacturing business could not be started for want of certain machinery. The assessee let out the factory sheds and claimed that the rental income was assessable as income from business. The High Court found that the assessee had not started its manufacturing business and, therefore, it could not be said that the assessee had derived its income by exploiting its commercial assets through other agencies. The rental income could not, therefore, be assessed as income from business. However, the assessee had also derived rental income from non-factory buildings including godowns. The facts showed that the assessee let out only the surplus portion after actual user of portions for its own business. Therefore, with respect to non-factory building including godowns, the High Court held that they were commercial assets of the company. The company was utilising the machinery for its own purposes. The income derived from letting out the surplus of the non factory buildings including godowns was the business income of the assessee. The Division Bench of the Calcutta High Court made the following observations with respect to non-factory buildings and income arising therefrom (at page 255) :
“In the instant case, as we have earlier noticed, the assessee was carrying on business and in the course of its trading activities the assessee was using and exploiting the non-factory buildings including its godowns. The non-factory buildings including the godowns, therefore, clearly constituted the commercial assets of the assessee; and as we have earlier noted the effect of the finding of the Tribunal is that non-factory buildings including the godowns are the commercial assets of a assessee-company. In the course of its trading activities the assessee itself had been using the said commercial assets and exploiting the major portions of the same and the surplus portion the assessee had exploited through others same and the surplus portion the assessee had exploited through others by letting out the same to others and the income derived from such letting out must, therefore, be considered to be business income of the assessee.”
The aforesaid observations, undoubtedly, help the-assessee. However, in our opinion, the observations made by the Division Bench while dealing with the income from non-factory buildings are too broad and are made without noticing the observations of the Supreme Court in the case of CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451. Not only the decision of the Supreme Court in the aforesaid case was not noticed by the Division Bench of the Calcutta High Court but, in our opinion, the observations made by the Supreme Court of India on page 458 of the report which dealt with an identical fact-situation are totally ignored, and, therefore, with utmost respect to the learned judges of the Division Bench of the Calcutta High Court, we cannot agree with their view that non-factory buildings including godowns were commercial assets of the company and that income derived from letting out surplus non-factory buildings including godowns was the business income of the assessee. The aforesaid observations of the Division Bench of the Calcutta High Court, with respect, run counter to the decision of the Supreme Court in the Case CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 and, to that extent, the decision of the Calcutta High Court fails to follow the binding precedent of the Supreme Court, and, therefore, is per incuriam.
The question as to whether a particular income falls under one head or the other has to be decided, having regard to the facts and circumstances of a cases. In Nalinikant Ambalal Mody v. S. A. L. Narayan Row, CIT [1966] 61 ITR 428, the Supreme Court observed (at page 432) :
“Whether an income falls under one head or another has to be decided according to the common notions of practical men, for the Act does not provide any guidance in the matter.”
The provisions of section 9 and 10 of the Indian Income-tax Act, 1922, correspond to sections 22 and 28 of the Act, 1961, the latter being in almost identical terms as the earlier enactment.
Section 22 of the Income-tax Act, 1961, reads as under :
“The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by hims the profits of which are chargeable to income-tax shall be chargeable to income-tax under the head income from house property.”
The section itself indicates that, merely because a person is the owner of the property, it does not follow that the income therefrom should be assessed under the heading “Income from house property”. It excepts portions of such property as may be occupied for the purposes of any business or profession carried on by him, the profits of which are chargeable to income-tax. It will be essential to find out the user of the property and the character in which that property is used. The distinction was very succinctly brought out by the Supreme Court in the case of Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362, at page 377 :
“Ownership of property and leasing it out may be done as a part of business, or it may be done as land owner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is ‘Income from property’ (section 9 of the Indian Income-tax Act, 1922), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property, but to selling them or turning them to account even by way of leasing them out as an integral part of its business, cannot be said to treat them as landowner but as trader. the case both for and against the assessee-company must be applied with this distinction properly borne in mind. In deciding whether a company dealt with its properties as owner, one must see not to the form which it gave to the transaction but to the substance of the matter.”
At another place in the same reported judgment in the of Karanpura Development Co. Ltd. [1962] 44 ITR 362 (SC) while dealing with the case of Commercial properties Ltd., In re, AIR 1928 Cal 456, the Supreme Court, on page 376, observed as under :
“There, the object of the registered company was to acquire land, build houses and let premises to tenants in Calcutta and elsewhere. The sole assets were three properties which were let out and all the registered company did was the management and collection of rents. Mr. Rankin C.J. held that the receipts were income from property within in mention of section 9 of the Income-tax Act, that letting out such property and collecting rents was not doing business, and that profits and gains from business were very different from income from property.”
This very view is reiterated by the Supreme Court in the case of S. G. Mercantile Corporation P. Ltd. v. CIT [1972] 83 ITR 700.
In the case of CIT v. National Storage Pvt. Ltd. [1967] 66 ITR 596 (SC), the assessee, after purchasing a plot of land constructed thirteen units thirteen, twelve units meant for the members of the Indian Motion Picture Distributors’ Association, who had floated a company, and one unit for foreign film distributors in Bombay, who were not members of the association. Each unit was divided into four vaults, having a ground floor for rewinding of films and an upper floor for storage of films. The assessee entered into agreements with film distributors who were permitted to use the vaults. There were other facilities also provided to the vault holders. The persons who had taken the value were describes as licences and they were liable to pay certain charges. A question that arose before the Supreme Court was as to whether the vaults were used for the purposes of the business and income arising was assessable under section 10 of the old Act equivalent to section 28 of the Act of 1961. The Supreme Court observed at page 601 as under :
“The question which really arises in the present whether the assessee is carrying on any business, i.e., is it carrying on any adventure or concern in the nature of trade, commoners or manufactur ? If it is carrying on any adventure or concern in the nature of trade, then section 9 (section 22 of the Act, 1961) specifically excludes the income derived from property from computation under section 9, if the property is occupied for the purpose of the adventure or concern.
At page 603, the Supreme Court further observed :
“The assessee was thus in occupation of all the premises for the purpose of its own concern, the concern being the hiring out of specially built vaults and providing special services to the licensees. As observed by Viscount finally in Governors of the Rotunda Hospital, Dublin v. Coman [1920] 7 TC 517 (HL), ‘The subject which is hired out is a complex one’ and the return received by the assessee is not the income derived from the exercise of property rights only but is derived from carrying on an adventure or concern in the nature of trade.”
The aforesaid principles were applied by a Division Bench of the Karnataka High Court in the case of Addl. CIT v. Hindiustan Machine Tools Ltd. [1980] 121 ITR 798. In that case, the assessee-company had constructed 50 sheds forming an industrial estate with the object of having ancillary units which would manufacture components required for the purpose of the machines in the manufacture of which it was engaged and these had been leased out to several persons on a rental basis. The object of the assessee was to set up a large number of small scale ancillary feeder industries in the industrial estate, owner and managed by small scale entrepreneurs mainly of the worker-proprietor type and to sub-contract to them the simpler components which do not require heavy equipment or a very high degree of skill and technique. The entrepreneurs for the units were selected by the assessee-company having regard to the candidate’s experience in the particular line, his technical competence and his genuine enthusiasm to build up competitive small scale industrial units. The assessee-company also afforded several facilities to the ancillary units which included free technical advice for the setting up of the units and for the manufacture of the components required by the assessee-company, training of workers for the units on a nominal charge, technical inspection and other services of the assessee-company to the fellest extent possible to the units at cost and supply of raw material and stores to be drawn by the units from the assessee-company at cost including overheads. The lessee agree, among other things, to permit the assessee-company’s agents, security staff and workmen to enter the premises at any time to view the condition thereof.
The Income-tax Officer held that income from the shed was income from house property under section 22 of the Act. The Appellate Assistant Commissioner held the income to be assessable as “business income” under section 28 of the Act. The Tribunal confirmed the order of the Appellate Assistant Commissioner. The High Court held that, instead of the assessee himself engaging in the manufacture of the components through it’s own labourers, the ancillary units were required to manufacture them for its purposes. The benefit which the assessee derived was almost direct. The dominant object was to have a ready sources of supply of components which the assessee itself might have found it convenient to manufacture and which it preferred the ancillary units to manufacture for it, and the leasing out of the premises in the industrial estate, therefore, was incidental to and for the purposes of the assessee’s business of manufacture of various machines and the income from leasing out the premises was part of its income from business.
In the case of Punjab National Bank Ltd. v. CIT [1983] 141 ITR 886 (Delhi), the assessee-bank owned a building of six floors, five of which were occupied by the assessee for the purpose of it’s business and it head office was located there. The sixth floor was let out to a party whose management had some connection with the management of the bank. The whole building was fitted with an air-conditioning plant and there were also lifts operating. The Tribunal allowed full depreciation on the building and the lifts and air-conditioning plant and also allowed development rebate in respect of the lifts and air-conditioning plant. On the aforesaid fact-situation, the Division Bench of the Delhi High Court was concerned with the entitlement of the assessee to depreciation and development rebate for lifts and the air-conditioning plant. In this case, the assessee-bank used five out of six floors of the building for business, and income therefrom was totally exempt under section 9 of the Act of 1922, or under section 22 of the Act of 1961. Tax was payable only in respect of one-sixth portion which was let out to another. As regards the claim for depreciation, it can only be allowed if it was a business asset under section 28 of the Act, 1961, read with section 32. In this context the court observed as under (at page 891) :
“This brings us to the question whether it can be said that the entire building is being used for business or only five-sixths of the same being used for business. It is contended on behalf of the assessee that the whole building is being used for business. The building is held as a business asset, it is being used as the head office. The mere fact that a part of it is used by letting it out does not made it anything but a business asset. A number of cases were cited before us to say what is a commercial asset and what is not a commercial asset. It has also been pointed out in those cases that a person is entitled to use a business assets in the most suitable way in which income can be generated. A number of examples of this have been cited before us and there can be no doubt that a commercial asset been cited before us and can be doubt that a commercial asset as such can be used by the assessee himself for crying on business, or they can be used by the assessee by hiring the same out to be used by another person for running the business. Such cases relate to business asset proper. There are commercially exploitable items, such as factories, machines and so on. A man may run a factory himself or get somebody else to run it. He may operate an income-yielding asset, such as a taxi or a truck or bus himself or hire the same hour to somebody else to do business. He may operate a cinema himself or somebody else may do so. We are not concerned with such a case here. The assessee operates a bank. It is not the case of the assessee that the tenant is operating a bank in the bank premises. The tenant is using a portion of the building for his own purposes. It is not different from that of any ordinary letting out of a building. An empty building has, no doubt, a commercial value in the sense that it is a place for carrying on business, but it not a commercial asset in the sense used in the cases we have examined.”
It becomes clear that the court has noticed that there are two line of cases and cases which deal with assets which are commercially exploited such as plant or machines or factories stand on a different fooling as compared to cases dealing with buildings or lands of the ownership of the assessee.
In the case of CIT v. Delhi Cloth and General Mills Co. Ltd. [1966] 59 ITR 152 (Punj), the assessee-company carried on various businesses, owned several buildings most of which were let out to its employees. The rental of the premises was fixed, it did not change with the change of the occupant and it was deducted from the wages of the employee or employees occupying the premises. On the question as to whether such income was assessable under the old section 9 (section 22 of the Act of 1961) or old section 10 (section 28 of the Act of 1961), the Division Bench of the Punjab High Court (Circuit Bench at Delhi) observed as under (at page 156) :
“Moreover in such cases, in order to arrive at a correct conclusion one is to read sections 9 and 10 together and not in an isolated manner and as divorced from one another. In section 9, an assessee is liable to pay tax on ‘rental income from property’ of which he is the owner other than the income from such portions of such property as he may occupy for the purposes of any of his business, etc. The Income from excepted property necessarily falls for assessment under section 10. Therefore, in each case, where there is a conflict as to whether income from property’ has to be assessed under section 9 or section 10, what has to be determined is whether such income does or does not arise from property occupied by him for purposes of his business. This question is essentially a question of fact. What has to be discovered in whether the property is subservient to the main business of the assessee. In others words, is the provision of residential quarter to its employees a part of the business of the compan ? The question then arises – what does the word ‘occupy’ mean in the contex ? It was contended by the learned counsel for the Department that the word ‘occupy’ means ‘actual physical occupation,’ while, on the other hand, it was contended by the learned counsel for the assessee that the word ‘occupy’ has a broader meaning and the ‘physical occupation’ of an owner’s premises my a tenant would be ‘occupation by the owner’, inasmuch as owner can occupy his property through his tenants who uterine to him and do not lay any hostile claim against him. In our opinion, the word ‘occupy’ cannot be given a retracted meaning, as is contended by the by the counsel for the Department. In the context of sections 9 and 10 an occupation by a tenant would be occupation by the owner and, therefore, legally the property would be in the occupation of the owner though not in his physical occupation.”
The court further observed (at page 157) :
“If both sections 9 and 10 of the Act are read together, it will be apparent that where the property is held and used for the purpose of business, income therefrom would be ‘income from business’ and not ‘income from property’.”
In the case of CIT v. Anand Rubber and Plastics (P) Ltd., [1989] 178 ITR 301 (P&H), the assessee-company was manufacturing rubber goods. The factory premises of the assessee consisted of three portions, the main buildings, a front shed and a rear shed. aid order to curtail the losses. Production was reduced with the result that the rear shed became surplus. The rear shed was leased out with a view to reduce the losses. The court found that the facts clearly showed that the shed was leased out temporarily as a commercial asset and hence the income was assessable as business income under section 28. The court applied the following test (at page 304) :
“‘Thus, in each case, what has to be seen is whether the asset is being exploited commercially by the letting out or whether it is being let out for the purpose of enjoying the rent. The distinction between the two is a narrow on and has to depend on certain facts peculiar to each cases’.”
From the observations made by the Supreme Court and various High Courts in diverse fact-situations, dealing with question as to under which head of income, the “rental income” would fall, in our opinion, the following principles emerges :
(i) No general principle could be laid down which is applicable to all cases and each case has to be decided on its own facts and circumstances.
(ii) Whether an income falls under one head or another has to be decided according to the common notions of a practical and reasonable man, for the Act does not provide any guidance in the matter.
(iii) In each case, what has to be seen is whether the asset is being exploited commercially by the letting out or whether it is being let out for the purpose of enjoying the rent. The distinction between the two in a narrow one hand has to depend on certain facts peculiar to each cases. Pure and simple. Commercial asset like machinery, plant, tools, industrial sheds on godowns having high business potential stand on a different fooling from assets like land or building.
(iv) If an assessee derived income from a commercial assets which is capable of being use as a commercial asset, then it is income from his business. Whether he uses that commercial asset himself for lets it out to somebody else to be used. The asset would not cease to be commercial asset simply because temporarily it was put out of use or it was let out to another person for his use.
(v) So long as the Commercial asset is capable of being exploited as such, its income is business income irrespective of the manner in which the asset is exploited by the owner of the business. He entitled to exploit it to his best advantage and be may do so either by using it himself personally or by letting it out to somebody else.
(vi) If the commercial asset is not capable of being used as such or as a commercial asset, then its being let out to other does not result in the accrual of business income.
(vii) When the assessee has stopped doing business altogether and when the asset ceases to have the character of business or commercial asset’s it becomes a capital asset. Qua such asset, the assessee is not carrying on any business. As the owner of the asset, he may exploit such asset but, in such circumstances, income which he receives is no longer business income but income from property owned by him and hence, “income from house property”.
(viii) When the asset is in the nature of land or building capable of being used for any other purpose and when the assessee ceases to use it is as a commercial asset either himself or even through others, the income derived by him by renting out the same would made appropriately fall under the head “Income from house property” as, like any other owner of property, he gets income from that property as owner. In such cases, it is not the factotum of his business or commercial activity which brings income to him but it is his investment in property or his ownership of property which brings income to him. In such cases, leasing of property itself is the activity. It is leased with a view to produce income, a transaction quite apart from the ordinary business activities of the assessee.
(ix) In the descending whether an assessee dealt with its property as owner or as a businessman or as a prudent man of commerce. One must see not the form which it gave to the transaction but to the substance of the matter. In which that property is used, ownership of property and leasing it out may be done as a part of business or it may be done as a landowner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. If the dominant object of leasing out in incidental to and for the purpose of the assessee’s business, the income would be business income. What has to be discovered is whether the property is subservient to the main business of the assessee.”
Applying the aforesaid principles to the facts of the case, we are of the opinion that the transaction of leasing out one building only to a third party was in no way connected with or ancillary to the business activity of the assessee. The assessee never wanted to exploit the asset as a commercial asset for any commercial gain. It acted like a prudent owner of the property. On closure of the business, instead of permitting the building to lie idle, it leased out the same with a view to earning rental income. The Tribunal was, therefore, right in holding that the rental income was “income from house property”.
The next question relates to the alternative submission made by Mr. D. A. Mehta for the assessee to the effect that, even if income by way of rent from the building let out was taxable under the head “Income from house property”, the assessee was entitled to claim depreciation on the said building under section 32 inasmuch as the said building was its business asset. Mr. D. A. Mehta, learned counsel, has place reliance on the decision of the Division Bench of this court in the case of Addl. CIT v. Laxmi Agents P. Ltd. [1980] 125 ITR 227 (at page 230) :
We have already pointed out that section 14 of the Act classifies income under six different heads and income which is specifically chargeable under a distinct head cannot be brought to charge under a different head for the simple reason that rules for computing income and the deductions which are permissible vary with each of the six different heads. Therefore, the scheme of the Act is first to classify the income under different heads and then to work out the computation under each of the heads as per the provisions relating to such had and then to total up the computation so made for the purpose of arriving at the final figure of total income liable to tax…. where a specific head of income in available for a particular item of income, that income should be assessed only under the specific head. In the case of United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688, the Supreme Court has made the following observations (at page 695) :
“The mandatory character of section 6 is indicated by the language employed in that section and the phraseology of all the sections following, i.e., 7 to 12 employing the words ‘the tax shall be payable under the head…. in respect of’ the different and distinct head of income, profits and gains, ‘salaries’, interest on securities’ and ‘property’, business’ etc., is inductive of the intention of the Legislature in making the various heads of income, profits and gains mutually exclusive. So every item of income, whatever its source, would fall under one particular head and for the purpose of computing the income for charging of income-tax the particular section dealing with that head will have to be looked at.”
Based on the above reasoning if the rental income of the building is treated as falling under the head “Income from house property”, question would be as to whether assessee is entitled to deduction of depreciation under section 32 of the Act. Assuming that the building was used initially as a business asset, the assessee is not entitled to depreciation. Section 32(1) provides for certain deductions by way of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of business or profession.
It is plain from the aforesaid provision that, in order to get deduction to depreciation, the assessee must be the owner of buildings, machinery, plant or furniture and secondly they must be used for the purpose of business or profession. In the case before us, the building is undoubtedly owned by the assessee but it cannot be said that it was used by the assessee for the purpose of business. In this case, admittedly, the building was let out to a third party and it was used by such third party for its own business Such user cannot be said to be the user by the assessee for its own purpose. The second requirement of section 32 is not satisfied and hence the assessee was not entitled to deduction of depreciation on the building which was let to a third party. Even assuming the rental income derived by the assessee from letting out the said building is treated as “income from business” and no “income from house property”, the assessee would not be entitled to deduction of depreciation, if section 32(1) of the Act is read with section 38(2) of Act Section 38(2) read as under :
“38. (2) Where any building, machinery, plant or furniture is not exclusively used for the purposes of the business or profession, the deductions under sub-clause (ii) of clause (a) and clause (c) of section 30. Clauses (i) and (ii) of section 31 and clauses (i), (ii) and (iii) of sub-section (1) and sub-section (1A) of section 32 shall be restricted to a fair proportionate part thereof such building, machinery, plant or furniture for the purposes of the business or profession.”
Since the building was not exclusively used for the purpose of the business or profession, as rightly found by the Tribunal, the assessee was not entitled to depreciation on the building which was let out.
In view of our specific finding that, neither under section 32 nor under section 38(2) of the Act, the assessee was entitled to depreciation, in our opinion, the decision of this court in the case of Laxmi Agents P. Ltd. [1980] 125 ITR 227, does not help the assessee and, therefore, we have not found it necessary to refer to that decision.
In view of the above discussion, we are of the view that the Tribunal was right answering questions number 5 and 6. We, therefore, answer question Nos. 5 and 6 in the affirmative, i.e., in favour of the Revenue and against the assessee. There shall be no order as to costs.