SENGUPTA, J. - (1.) IN this reference under s. 256(1) of the IT Act, 1961 ('the Act') at the instance of both the Revenue as well as the assessee, the following questions of law have been referred for the opinion of this Court: Questions at the instance of the Revenue: "1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that rental income derived from letting out of the godowns amounting to Rs. 11,61,691 (for asst. yr. 1983-84) and Rs. 11,61,961 (for asst. yr. 1984-85) should be treated as business income and assessed as such? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the set off of unabsorbed business losses should be allowed against the income derived from letting out of the godowns?" Questions at the instance of the assessee: "1. Whether, on the facts and in the circumstances of the case, and on a correct interpretation of the relevant provisions of the IT Act, the Tribunal misdirected itself in law in holding: (a) that the addition of differences in rental income derived from Shriram (Overseas) Pvt. Ltd. (the then subsidiary company) and including the said amount of Rs. 90,110 (for asst. yr. 1983-84) and Rs.67,597 (for asst. yr. 1984-85 again in the hands of Shriram Jute Products Ltd.(the then Holding Company) and (b) That whether it at all leads to any division of income and would be taxed again when the same amount was already taxed in the hands of Shriram (Overseas) Pvt. Ltd.? And (c) That whether it was justified in assessing the said amount under the head ' "Income from other sources"?"
(2.) WE would first deal with the references at the instance of the Revenue. It relates to the Income- tax assessment of the assessee-company for the previous years ending 31st Oct., 1982 and 31st Oct., 1983, corresponding to the asst. yrs. 1983-84 and 1984-85. The relevant facts as found by the Tribunal are as under: The assessee-company is engaged in the business of manufacture and sale of Laminated Jute Bags. It also derived income from letting out of godowns and offered the same for assessment under the head "Profits and gains of business or profession" and claimed set off of brought forward business losses against such rental income. In the earlier years, income derived by the assessee- company from letting out godowns was assessed as business income, but during the two years under reference, the ITO observed that the position had changed substantially and the rental income from letting out of godowns could no longer be assessed as business income. The ITO found that until 1980 the assessee-company was engaged in the business of manufacturing Jute Goods. At that time, it used to let out surplus capacity in its godowns for temporary periods. These godowns were being utilised by the assessee-company for storage of raw materials, finished goods, stores and other materials in connection with jute manufacturing business. The rental income from letting out such surplus capacity for temporary period was being assessed as business income. However, subsequently, on account of various constraints more particularly inadequate funds required for modernisation of Jute Mill Machinery, inadequate power supply and continuous labour troubles, the assessee-company suspended its activity of manufacturing Jute Bags in the year 1981. The ITO also found that during the previous year relevant to the asst. yr. 1983-84, the assessee-company sold machinery of the value of Rs.6,20,532 and in the previous year relevant to the asst. yr. 1984-85, there was another sale of Jute Mill machineries of Rs. 13,97,105. The balance machineries in the hands of the assessee-company as evident from the balance sheet drawn as at 31st Oct., 1983 was Rs.6,26,339 only which admittedly related to Laminated Bag Division.
(3.) FROM the aforesaid facts, the ITO concluded that the assessee-company has permanently stopped its Jute Mill business since the relevant machineries installed in the Jute Mill Factory had already been sold away. He, therefore, observed that the godowns ceased to be commercial assets of the assessee-company and the rental Income therefrom could no longer be assessed as business income. The assessee-company also incurred substantial expenditure for extension, addition and alteration in the godowns in order to make them suitable for hiring out on long-term basis. The ITO, therefore, observed that the principles of res judicata were not applicable as altogether a new fact-situation had emerged calling for a fresh consideration. There was complete change in the facts and circumstances of the assessee's business activities, it can no longer be said that letting out of godowns constitute exploitation of commercial assets by the assessee-company. Since the Jute Mill business was completely stopped and the godowns in possession of the assessee-company were far in excess of its requirements, the godowns let out in the two previous years under reference cannot any more be considered as commercial assets. The ITO, therefore, assessed the rental income from letting out of the godowns under the head "Income from other sources" and refused to set off the brought forward business losses against such income.;