Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: EXPRESS NEWSPAPERS (PVT.) LTD. VS Respondent: COMMISSIONER OF INCOME-TAX
Court Name: Madras High Court Judge(s): N. V. Balasubramanian, K. A. Thanikkachalam Title: EXPRESS NEWSPAPERS (PVT.) LTD. vs COMMISSIONER OF INCOME-TAX Case No.: Tax Case References Nos.1824 of 1984 and 940 of 1985 Date of Judgment:1996-08-07 Reported As: 1999 PTD 2574 Result: Reference answered
JUDGMENT
JUDGMENT ' K. A. THANIKKACHALAM, J.---In compliance with the order passed by this Court in T.C.P. No,8 of 1983, dated July 4, 1983, and in compliance with the order passed in T.C.P. No,210 of 1983, dated November 7, 1983, the Tribunal referred the following questions for the opinion of this Court under section 256(2) of the Income Tax Act, 1961, hereinafter referred to as the "Act": ' Tax Case No,1824 of 1984: "(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the income from hire charges of printing machinery and motor vehicles derived by the assessee is assessable under the head 'other sources' and not under the head 'business'? (2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sums of Rs,4,59,396 and Rs,2,862 representing interest provided in respect of moneys borrowed by the assessee and written back in the accounts of the assessee are chargeable to tax as income under section 41(1) of the Income Tax Act, 1961?" ' Tax Case No,940 of 1985: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income derived by the assessee for providing air-conditioning services is not assessable under the head 'business', but should be assessed as 'Income from other sources'?" ' In so far as Tax Case No,1824 of 1984 is concerned, the facts leading to question No,1 are as under: ' The assessee is a private limited company publishing newspapers. From the year 1969, it discontinued that activity, but yet got the newspapers published through some other agency. It is own printing machinery and motor vehicles were given on hire and the income that it received by way of hire charges was shown in the earlier years as income from "other sources" and the
---
## Page 2
Department also accepted it. But for the year under consideration, i,e,, 1976-77 assessment year, the assessee changed the head of income from "Other sources" to "Business". The Income-tax Officer, on the basis of the past record, declined to accept the asessee's claim and his action was confirmed by the Commissioner of Income-tax (Appeals). In the further appeal filed against that order before the Tribunal, it was contended that since the principle of res judicata was not applicable to income-tax matters, the past history and the past conduct of the assessee should not have been looked into and the assessee's claim should have been decided on the merits. The Tribunal found that the contention put forward on behalf of the Revenue is acceptable. The records showed that ever since the publication was discontinued, the income from hire charges was disclosed as income from "other sources". Considering the provisions of section 56(2)(iii) of the Act, the Tribunal held that the income from such letting should be charged as income from other sources. The Tribunal, thus, held that the Revenue's claim is correct and sustainable and that the assessee's claim was not acceptable. ' In so far as the second question in Tax Case No,1824 of 1984 is concerned, the relevant facts are as under: ' In the course of the assessee's business as a dealer in shares, the assessee borrowed moneys from various share brokers. The interest provided in the accounts in respect of such borrowable was claimed as a deduction and was allowed as such in computing the income of the assessee in the earlier years. Subsequently, at the time of settlement of accounts with the share brokers, the amount due to them on account of interest was settled at a figure lower than the figure provided in the accounts. As a consequence, the amounts thus given up were written back in the accounts as income which amounted to Rs,4,59,396 and Rs,2,862. These sums were brought to tax under section 41(1) of the Income-tax Act. The assessee did not accept this position and appealed to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) confirmed the order passed by the Income-tax Officer on this aspect. Aggrieved, a second appeal was filed before the Tribunal. The contention put forward on behalf of the assessee was that for section 41(1) to apply, the expenditure by way of interest incurred in the earlier years and allowed as deduction could be brought to tax only if it was recouped in cash or in any other manner whatsoever and that any other manner did not include settlement. The further contention was that the fiction enacted in section 41(1) applied only to remission or cessation of a trading liability. The Tribunal found it extremely difficult to accept these contentions. According to the Tribunal, there are two basic requirements for the application of section 41(1). One was there must be an allowance or deduction in the assessm ent for any year in respect of loss or expenditure or trading liability incurred by the assessee. The other was that subsequently during the previous year the assessee must have obtained whether in cash or in any other manner whatsoever any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation so that the remission or cessation so obtained on the value of the benefit accruing could be deemed as the income of the assessee. The Tribunal held that these two requirements were more than fully satisfied in this case the amount of interest was allowed by the Department in the earlier years. When the settlement was reached between the assessee and the share brokers, as a consequence of which the liability to pay interest got extinguished, the assessee got a benefit and that satisfied the second requirement. The Tribunal also drew support for its view from a decision of the Gujarat High Court in CIT v. Rashmi Trading (1976)103 ITR 312 to find that the requirements of section 41(1) were satisfied. Thus, the Tribunal agreed with the Revenue and disallowed the claim of the assessee. ' In so far as Tax Case No,940 of 1985 is concerned, there is only one question referred by the Tribunal, which relates to whether the income derived by the assessee for providing air- conditioning services is not assessable under the head "Business" or under the head "Income from
---
## Page 3
other sources". The facts leading to the abovesaid question are as under: In the assessment year 1976-77, the assessee had a property at Mathura Road, Delhi, a portion of which was allotted to its sister concern, Indian Express Newspapers (Bombay) Private Ltd., while the other portions were let out to Hindustan Lever Ltd., Bharat Heavy Electricals Ltd. And Minerals and Metals Trading Corporation of India (Private) Ltd. The assessee had an agreement with the tenants providing for rent but specifically for the charges payable for air-conditioning the building being centrally air- conditioned. The assessee worked out the amount receivable towards hire charges for air- conditioning and also allocated the consolidated rent received from the sister concern towards air-conditioning. The air-conditioning charges were separately reckoned and offered by the assessee as business income, whereas the balance was treated as rental income, assessable under the head "Property". The Income-tax Officer held that the air-conditioning charges could not be taken as business income and assessed such charges under the head "other sources". On the assessee's appeal, the Commissioner of Income-tax (Appeals) held that the surplus receipt over the expenditure in respect of air-conditioning charges was assessable as business income (such a surplus being Rs,12,10,303 as taken by him). On the Department's further appeal, the Tribunal restored the Income-tax Officer's order. According to the Tribunal, the assessee is not holding the property primarily as a business asset. The Tribunal further pointed out that the relationship between the assessee and its tenants was that of landlord and tenant and not as between a businessm an and his customers. The Tribunal accepted the contention put forward by the Department that central heating/air-conditioning is an amenity in a modern building. Reliance was placed upon earlier decisions of this Court in CIT v. Lakshmi Co. (1982) 133 ITR 904 and CIT v. Admiralty Flats Motel (1982) 133 ITR 895 (Mad.). The Tribunal has also pointed out that it was satisfied in the facts of the assessee's case that the allocation, which is not in dispute, between rent and the air-conditioning charges in respect of the amounts received from the tenants justify the rental part to be assessed as income from property and the service charges as income from other sources. According to the Tribunal as long as it is found that there is a severable contract as between rent and service charges in respect of these tenants, it is open to him to take that stand. Thus, ultimately, the Tribunal agreed with the view taken by the Income-tax Officer in assessing the income derived by providing air-conditioning to the tenants as income from other sources. ' In Tax Case No,1824 of 1984, question No,1 relates to assessing the hire charges received by the assessee by hiring the printing machinery and motor vehicles. According to the assessee, such hiring charges should be assessed under the head "Business". But according to the Department, such hiring charges should be assessed under the head "other sources". The assessee received hire charges on hiring the machinery and motor vehicles from Indian Express (Madurai) on machinery installed at Madurai and from Andhra Prabha Ltd., amounting in all to Rs,2,21,500. Learned counsel appearing for the assessee submitted that the fact that in the earlier years the hiring charges for hiring the machinery and the motor vehicles was offered and assessed as income from other sources would not preclude the assessee to claim that such income should be assessed under the head "Business" in the assessment year under consideration. According to learned counsel appearing for the assessee though the assessee discontinued the printing and publishing works, the assessee was continuing the publication works through its sister concern. Since the printing was discontinued, the printing machinery and the motor vehicles were hired to the sister concern and income earned by way of hiring the machinery and the motor vehicles. Therefore, inasmuch as the publishing activities continued, if cannot be said that the income earned by way of hiring the machinery and the motor vehicles would not come under the head "Business income". In order to support this contention, learned counsel appearing for the assessee relied upon two decisions, CIT v. Kongarar Spinners (Pvt.) Ltd. (1994) 208 ITR 645 (Mad.) and B. Nagi Reddy v. CIT (1993) 199 ITR 451 (Mad.).
---
## Page 4
' On the other hand, learned senior standing counsel appearing for the Department, submitted that the business of the assessee in publishing the newspapers as well as printing were discontinued from the year 1969 onwards. Therefore, the income derived by hiring the machinery and the motor vehicles cannot be considered as income from business. Learned senior standing counsel also pointed put that the assessm ent in each year has got to be completed independently without depending upon the earlier years' assessment, since the principle of res judicata is not applicable in tax cases. Learned senior standing counsel also pointed out that hiring the machinery and the motor vehicles is not the business of the assessee. Therefore, unless the assessee is doing the business and the assessee had income out of such business, that alone can be considered as business income. In the present case, inasmuch as the assessee discontinued its business of publishing the newspaper, it cannot claim the income earned by way of hiring the machinery and motor vehicles as income from business. Learned senior standing counsel further pointed out that the provision of law applicable on the facts arising in this case would be section 56(2)(ii) and the provisions contained in section 56(2)(iii) would not be applicable to the facts arising in this case, because the machinery was not hired alongwith the building. In order to support his contention, learned senior standing counsel relied upon the decision of the Supreme Court in New Sayan Sugar and Gar Refining Co. Ltd. v. CIT (1969) 74 ITR 7 and another decision of this Court in CIT v. Central Studios (P.) Ltd. (1973) 88 ITR 298 (Mad.). ' We have heard both learned counsel appearing for the assessee as well as learned senior standing counsel appearing for the Department. The point for consideration is whether the income derived by the assessee in the assessment year under consideration by hiring the machinery and the motor vehicles can be assessed under the head "Business income". Admittedly, the assessee discontinued the business in publishing newspapers due to labour trouble, etc., and the printing works from the year 1969 onwards. The assessee gets its newspapers published through some other agency, which is a sister concern. After the business was stopped, the printing machinery and motor vehicles were given on hire and, consequently, the income was received by way of hire charges. It is also the admitted case that the assessee is not doing business in hiring machinery and motor vehicles. ' Section 56(2)(iii) of the Act states as under: "Where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head 'Profits and gains oi business or profession' . " ' In the present case the buildings were not hired so as to say that the building is inseparable from the letting of the machinery. The printing machinery was hired separately. Therefore, on the facts, the provisions contained in section 56(2)(iii) of the Act would not be applicable. The proper provision that would be applicable according to the facts arising in this case is section 56(2)(ii) of the Act, which states as under: "income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head 'Profits and gains of business or profession' ." ' In any event, the assessee must show that it was doing business and the income was earned during the course of doing such business. But, in the present case, the assessee is not doing its business of publishing newspapers. It stopped such publication from the year 1969 onwards. But publication was being done through the sister concern. ' In CIT v. Kongarar Spinners (Pvt.) Ltd. (1994) 208 ITR 645 (Mad.) the question that arose for consideration was that whether the Tribunal was right in holding that the rent receipt from Selvi Textiles (P.) Ltd., on letting out to them a building to be used as a factory building should be assessed under the head "Business" and not under the head "House property". While answering this
---
## Page 5
question, this Court held that in the instant case the assessee, which was already running a factory, had built another factory in its own compound and given it on rent to its subsidiary. The Tribunal found that the assessee was exploiting the asset indirectly through its subsidiary. Hence the income derived by the assessee had to be assessed under the head "Income from property". The facts arising in the abovesaid decision would go to show that the assessee was doing its business and during the course of its business, another factory building was put up and that was exploited- by letting it out. Therefore, this Court held that the income from the property let out should be assessed under the head "business". But in the present case the assessee stopped its business of publishing newspaper from 1969 onwards. The assessee was not doing business while hiring the machinery and the motor vehicles. Therefore, this decision would not render any assistance to the assessee to contend that the income derived by hiring the machinery and motor vehicles should be assessed under the head "business income". ' In B. Nagi Reddy v. CIT (1993) 199 ITR 451 (Mad.), the question that arose for consideration was whether the Appellate Tribunal was right in holding that the income derived by the assessee from letting out the studios is assessable under the head "Business". While answering this question, this Court held that there is no such thing as a naturally born commercial asset, as an asset becomes a commercial one in view of the use to which it is put in a business and not owing to its inherent qualities. Considering the activities of the assessee in film business, as a producer, distributor, exhibitor, studio owner and the like, it was held that, on an overall consideration of the facts, the tax treatment to be accorded to the rental income had to be determined and the utilisation of the studios by the assessee by making his own films and the letting out of the buildings to others as well as realising rental income, constituted the business activities of the assessee in relation to the studios, and, therefore, the rental income should be brought to tax under the head "Business income", Therefore, here also the assessee was continuing its business and in the course of the business, the rental income was earned by letting out the studios. Therefore, in that case this Colin held that the income derived by letting out the studios should be assessed under the head "Business income". But the facts in the present case are different inasmuch as the assessee discontinued its business of publishing the newspapers from the year 1969 onwards. Though the assessee says that the publication work was being done through its sister concern, the sister concern is a separate entity and the business so done by the sister concern cannot be considered as business done by the assessee itself. Therefore, this decision also would not be applicable to the facts of this case. ' In New Savan Sugar and Gur Refining Co. Ltd. v. CIT (1969) 74 ITR 7 (SC), a question arose whether the income of the assessee-company was liable to be assessed under section 12 of the Indian Income-tax Act, and not under section 10 of the said Act. In the assessment proceedings for 1955- 56, the assessee's main contention was that the lease granted under the indenture of March 15, 1948, was a lease of a commercial asset and, therefore, the income arising from the lease should be assessed under section 10 of the Income-tax Act and the assessee should be allowed depreciation and development rebate in accordance with clause (vi-a) and clause (vi-b) of subsection (2) of section 10 of the Income-tax Act. While answering this question, the Supreme Court held that on the terms of the lease deed, the intention of the appellant was to part with the entire machinery of the factory and the premises with the obvious purpose of earning rental income and not to treat the factory and the machinery as a commercial asset during the subsistence of the lease. The intention of the appellant was to go out of the business altogether so far as the factory and machinery were concerned with effect from June 1, 1945. The income from the lease could not be assessed under section 10, but was liable to be assessed under section 12. ' In CIT v. Central Studios (P.) Ltd. (1973) 88 ITR 298 (Mad.), a question arose whether the rents received by the assessee-company from the studio building in the accounting year would come
---
## Page 6
under the head "Income from property" or under the head "Business income". While answering this question, this Court held that (1) each assessment year is a unit by itself and the decision rendered with reference to any particular year will not constitute res judicata or estoppel in relation to the assessm ent for the subsequent years, so as to bind either the assessee or the Revenue; (2) the rent received by the assessee could only be traced to the ownership of the building by the assessee and could not be said to be income from the business of film production, especially when the assessee had sold all the machinery required therefor and hence would fall under the head "Income from property", and not under the head 'Profits and gains of business". ' Thus, on a careful consideration of the facts arising in this case, inasmuch as the assessee discontinued its business of printing and publishing the newspaper from 1969 onwards and the business of publishing the newspaper done by the sister concern the business cannot be considered to be the business done by the assessee. Therefore, the income derived by the assessee by letting out the machinery and the motor vehicles would relate to letting out the machinery and the motor vehicles as the owner of the same and the letting out would not in any way relate to the business. When the income is not earned in the course of the business, it cannot be assessed under the head 'Business income". One of the contentions put forward on behalf of the assessee was, when the asset is a commercial asset, the assessee can exploit the same in whichever manner he likes and the income derived from such asset should be assessed under the head "Business income". As already pointed out, in the above cited decision of this Court, it was held that no asset could be a commercial asset from its inception. In order to consider Whether an asset is a commercial asset, the assessee must do his business, by exploiting the said asset. In the present case, admittedly the business of publication and printing was discontinued from the year 1969 onwards, and, therefore, for the assessment year under consideration, it cannot be said that the assessee was doing any business and exploiting the assets in the said business. Therefore, the printing machinery and the motor vehicles cannot be considered to be commercial assets. In view of the foregoing reasons, we consider that there is no infirmity in the order passed by the Tribunal in directing to assess the income derived by letting out the machinery and the motor vehicles as income "from other sources". Accordingly, we answer question No,1 in Tax Case No,1824 of 1984 referred to us in the affirmative and against the assessee. ' Question No,2 in Tax Case No,1824 of 1984 relates to income taxable under section 41(1) of the Act. In the course of the assessee's business as a dealer in shares, the assessee borrowed moneys from various share-brokers. The interest provided in the accounts in respect of such borrowers was claimed as a deduction and was allowed as such in computing the income of the assessee in the earlier years. Subsequently, at the time of settlement of accounts with the sharebrokers, the amount due to them on account of interest was settled at a figure lower than the figure provided for in the accounts. As a result, the amounts, thus, given up were written back in the accounts as income, which amounted to Rs,4,59,396 and Rs,2,862. These sums were brought to tax under section 41(1) of the Act. According to the assessee for section 41(1) to apply the expenditure by way of interest incurred in the earlier years and allowed as deduction could be brought to tax only if it was recouped in cash or in any other manner whatsoever and that any other manner did not include settlement. It was further pointed out that the fiction enacted in section 41(1) would apply only to remission or cessation of a trading liability. It remains to be seen that there are two basics requirements for the application of section 41(1) of the Act. One was there must be an allowance or deduction in the assessm ents for any year in respect of loss or expenditure or trading liability incurred by the assessee. The other was that subsequently during the previous year the assessee must have obtained whether in cash or any other manner whatsoever any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation, so that the remission or cessation so obtained on the value of the benefit accruing could
---
## Page 7
be deemed as the income of the assessee. It is admitted that the amount of interest was allowed by the Department in the earlier years. A settlement was reached between the assessee and the sharebrokers. On account of that, the liability to pay interest got extinguished. The assessee, therefore, got a benefit. This satisfied the second requirement according to the Tribunal. The submission made by the assessee that the…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.