HARRIES, C. J. - (1.) THIS is a reference under s. 66(1) of the Indian IT Act, made by the Tribunal, Madras Bench, in which the following question is propounded for the opinion of this Court : " Whether in the facts and circumstances of the case, the income in question, viz., Rs. 2,000, was rightly treated as the income from business for excess profits tax purposes ? "
(2.) THE facts giving rise to this litigation may be shortly stated as follows : THE assessees are a limited liability company carrying on business as manufacturers of jute products. THE assessees had let a portion of their business premises to a firm known as Radha Kant and Co. who were conducting the business of dehydrating potatoes. THE assessees claimed that the rent payable by Radha Kant and Co. had not been fixed and that there was a dispute concerning it. Hence their return did not show any rent received in respect of this letting. THE ITO did not accept this contention and estimated the income from this letting for ten months of the assessable year at Rs. 2,000. This amount was added to the income of the company for the purpose of assessing excess profits tax. THE assessee company appealed to the AAC from the order of the ITO, but the appeal was dismissed. THEre was a further appeal to the Tribunal and there it was contended that the sum of Rs. 2,000 could not be taken into account for the purposes of assessing the income liable to excess profits tax. THE appeal was however dismissed as in the view of the Tribunal this sum of Rs. 2,000 was rightly taken into consideration for the purposes of excess profits tax. THE Tribunal pointed out that the assessee company let other portions of their premises to various tenants for use as godown and had received from these tenants yearly a sum of about Rs. 37,000. This sum, the Tribunal point out, was shown by the assessee-company as part of their income from business and they were accordingly assessed in respect of it under s. 10 of the IT Act. THE assessee company apparently denied this before the Tribunal, but the Tribunal point out that the actual assessments show that in respect of this income they were assessed under s. 10 of the Act. Further the Tribunal point out that the memorandum of association of the assessee-company permits them to purchase, sell, hire and let lands, buildings, warehouses, etc. Those being the circumstances the Tribunal were satisfied that the assessees were carrying on " an operation of business when it was regularly letting out a portion of its business premises to third parties. " THE Tribunal accordingly held that this sum of Rs. 2,000 payable in respect of the portion of the premises let to Radha Kant and Co. was to be assessed as part of the business income. The Tribunal relied in the main for its finding on r. 4, sub- r. (4), of Schedule I, of the EPT Act, 1940. This sub-rule reads as follows : " In the case of a business which consists wholly or partly in the letting out of property on hire, the income from the property shall be included in the profits of the business whether or not it has been charged to income-tax under s. 9 of the Indian IT Act, 1922, or under any other section of that Act. " In the view of the Tribunal the business of the assessees consisted partly in letting out property on hire and therefore the income derived from such letting was rightly included in the profits of the business. It will be seen that this rule deals with cases where a business consists wholly or partly in letting out property and before it can apply, the letting of the property must be wholly the business of the company or at least part of the business. In the IT Act, 1922, " business " is defined in s. 2(4). The term " business ", it is said, includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. It has been held by this Court in the case of In re, Commercial Properties Ltd. 1928 ILR 55 Cal 1057 that owning property and carrying on only the business of letting such houses is not a business within the meaning of that term as used in the IT Act and that the income from the letting of such property cannot be regarded as the profits and gains of a business and therefore taxable under s. 10 of the Act. The income must be regarded as the income from property and therefore taxable under s. 9 of the Act. In that case the Commercial Properties Limited were a registered company the sole object of which was to acquire land, build houses and let premises to tenants in Calcutta or elsewhere in India. At the time of assessment the sole assets of the assessees consisted of three properties and the sole business of the assessees was the management and collection of rents from the said properties. It was held that the income from these properties could not be treated as the profits and gains of business, but rather as income from property taxable under s. 9 of the Act. At page 1061, Rankin, C. J., who delivered the judgment of the Special Bench of three Judges observed : " In the present case we have a company which owns three estates. It does not appear that any part of that property is outside the definition given in s. 9. It is found to let the houses from time to time, to see to the payment of rents and doubtless the doing of repairs. If that is carrying on a business, then this company carried on a business in the sense in which every landlord or owner of this type of property must necessarily carry on business. " At page 1062 the learned Chief Justice observed :- "In my judgment the words of s. 6 and s. 9 and s. 10 must be read so as to give some effect to the contrast that is there made between income, profits and gains from 'property' and from ' business ' ; and I entirely refuse my assent to the proposition that because it happens that the owner of a property is a company which has been incorporated for the purpose of owning such property, therefore the income derived from ' property ' must be regarded as income derived from ' business '. In my judgment, income derived from ' property ' is a more specific category applicable to the present case. " At page 1066 the learned Chief Justice after discussing certain English cases sums up the matter in these words : " In my judgment, these cases are not authorities to the effect that as between the word 'property' and the word ' business ' in s. 6 of the Indian IT Act, 1922, a case of this character is to be put under the word ' business '. It comes more directly and specifically under the word ' property '. In my judgment, the mere fact that the house-owner is a company does not change the incidence of the tax in the way contended for. The income of the assessee is income derived from its ownership of buildings and their curtilages. To obtain such income a certain amount of management is always necessary but the Act does not regard such income as profits of management. To own houses one must buy or build them, but the Act does not regard such income as profits of investment. "
(3.) THE Madras High Court took a different view in CIT vs. Gin and Rice Factory 1926 ILR 50 Mad 529 and CIT vs. Bosotto Brothers Ltd. (1940) 8 ITR 41 (Mad) However it is clear that this Bench is bound by the view of this Court and therefore I am bound to hold that for the purposes of the Indian IT Act, the mere management of property does not amount to a business and income derived from such property cannot be regarded as the profits and gains of a business. If a company whose sole activities consist in building houses, letting out the same and collecting the rents thereof does not carry on a business, in the sense that the rents and profits it receives are profits and gains of business, it appears to me to follow that if a company engaged in some manufacturing business lets out part of its property to tenants the rents and profits received from such letting cannot be regarded as the profits of its business, and therefore the letting of that property is not either part of its business or separate business as that term is regarded in the Indian IT Act. That being so, I should be bound to hold that this sum of Rs. 2,000 received in respect of the letting to Radha Kant and Co., could not be assessed to income-tax, as part of the profits and gains of the business, but would have to be assessed as income derived from property. THE Tribunal point out that in the past certain other rents for godowns have been included as part of the profits and gains of the business and that is used as an argument for including this sum of Rs. 2,000 as part of the profits and gains of the business. In my view, the rents for these godowns were wrongly included as part of the profits of the business and the assessees were wrongly assessed under s. 10 of the Act in respect of them. THE fact that similar rents have been wrongly assessed in the past is no reason whatsoever why this sum of Rs. 2,000 should now be regarded, for the purposes of income-tax at least, as part of the profits and gains of the business. THE definition of " business " in the EPT Act, 1940, is the definition contained in the Indian IT Act, 1922, but somewhat enlarged. " Business " is defined in s. 2(5) of the Excess Profits Tax Act, 1940, as including " any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture or any profession or vocation, but does not include a profession carried on by an individual or by individuals in partnership if the profits of the profession depend wholly or mainly on his or their personal qualifications unless such profession consists wholly or mainly in the making of contracts on behalf of other persons or the giving to other persons of advice of a commercial nature in connection with the making of contracts : Provided that where the functions of a company or of a society incorporated by or under any enactment consist wholly or mainly in the holding of investments or other property, the holding of the investment or property shall be deemed for the purpose of this definition to be a business carried on by such company or society. " It will be seen from this proviso that it is conceded that the holding of investments or other property is not a business for the purposes of the definition contained in s. 2(5) of the EPT Act. But it provides that if the functions of a company or of a society incorporated by or under any enactment consist wholly or mainly in the holding of investments or property then the holding of such investments or property, though not a business, shall be deemed to be a business for the purposes of the Act. This proviso to my mind admits the correctness of the decision in In re, Commercial Properties Ltd 1928 ILR 55 Cal 1057. But it expressly makes the activities of a company wholly or mainly concerned with the holding of property a business for the purpose of the Act. The assessee-company in this case was, as its name suggests, a company engaged in the manufacture and sale of jute products. It apparently owned a jute mill and the letting of godowns or parts of their business premises appears to have been incidental to the main business of the assessee. There is no finding by the Tribunal that the letting of the property was the whole business or the main business of the assessee-company, but the Tribunal was satisfied that it was part of the business and therefore the income from the letting of such property was rightly included as part of the business income for the purposes of the EPT Act.;