R.R. Rastogi, J.
1. The Income-tax Appellate Tribunal, Delhi Bench ' A ', has referred the following questions for the opinion of this court. By the assesses :
' Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the sum of Rs. 7,016 estimated to be the expenditure incurred by the company on the entertainment of customers and clients at its various offices was in the nature of entertainment expenditure within the meaning of Section 37(2) of the, Act '
By the Commissioner :
' (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Abohar Ginning Unit had not beenformed by the reconstruction of an already existing business but was entitled to exemption under Section 84 of the I.T. Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the one-half of the profits of the previous years should be added to the capital computation for purposes of calculating the relief under Section 84 ?
(3) Whether, on the facts and in the circumstances of the case, the ITO was justified in estimating the annual letting value of the premises in question at Rs. 96,000 notwithstanding the fact that the quarters had already been let out to the Modi Industries Ltd., for a rent of Rs. 27,462?'
2. M/s. Modi Spinning and Weaving Mills Co. Ltd., Modinagar, hereinafter referred to as the assessee, is a public limited company carrying on business at Modinagar. The assessment year involved is 1965-66, the corresponding accounting period ended on April 30, 1964. The ITO made several additions and disallowed certain expenses claimed by the assessee, one of which was entertainment expenditure and the question referred at the instance of the assessee relates to the same. The assessee had debited a sum of Rs. 1,14,448 to the mess account in the accounts of its head office and of different units. Out of that amount a sum of Rs. 32,016 had been paid to the local restaurants and hotel for tea, etc., and it was claimed that that expenditure had been incurred by the assessee on the members of the staff. It was, however, admitted that that amount also included expenses incurred in entertaining the customers, merchants, and agents who came to the assessee's mill at Modinagar. In the absence of proper details, the ITO disallowed half of the said expenses being expenses incurred for the entertainment of the customers. The disallowance was upheld by the AAC on appeal. On further appeal before the Appellate Tribunal, it was urged that similar expenditure claimed by the assessee in the preceding year had been allowed by the Appellate Tribunal. In that year, the expenses claimed by the assessee had only been in respect of tea provided to the members of the staff while in the year under consideration this amount included expenditure incurred in entertaining the customers, merchants and agents as well. Hence, in the absence of fuller details and on a comparison with the figures of the earlier year, the Appellate Tribunal estimated Rs. 25,000 as expenditure incurred on the members of the staff and the balance of Rs. 7,016 as expenditure incurred on guests and occasional visitors. The disallowance was, thus, sustained at Rs. 7,016.
3. So far as this disallowance is concerned, the matter is covered by a decision of this court rendered in Brij Roman Dass & Sons v. CIT : 104ITR541(All) . Entertainment expenditure incurred on customers was held to be governed by Section 37(2A) of the I.T. Act, 1961. The correspondingprovision is now contained in Section 37(2) and respectfully following that decision we agree with the view taken by the Appellate Tribunal in regard to the amount of Rs. 7,016.
4. Now, coming to the questions, referred at the instance of the Commissioner, in regard to question No. 1 the facts briefly stated are that during the relevant previous year the assessee had set up a ginning press mill at Aboharand it started working from February, 1964. The assessee claimed that it had a profit of Rs. 90,330 from this mill and in respect of the same claimed rebate under Section 84 of the Act. The ITO did not accept that claim, the reasons being that if the purchase tax of Rs. 2,25.935 payable by this unit on the total purchases made by it was debited to the profit and loss account of the unit, there would be no profit available ; secondly, this unit had been set up from borrowed funds and if the liabilities payable in that behalf be excluded, the capital employed in this business would come to nil and, lastly, the computation of profit at Rs. 90,330 was not correct.
5. When the matter came up in appeal before the AAC two additional grounds were urged in respect of this claim on behalf of the ITO and they were that, firstly, the sales of the pressed cotton had been made to the other units of the assessee at rates higher than the market value and this could not be done ; and, secondly, it was a case of expansion and could be said to have been formed as a result of the reconstruction of a business already in existence and as such was not entitled to exemption. The AAC accepted this last ground and upheld the disallowance of the claim. In second appeal, it was urged before the Appellate Tribunal on behalf of the assessee that the Abohar Ginning Press was an independent and economically viable unit and a substantial amount had been invested in it. This unit was bigger than the ginning unit which the assessee already had at Patiala. The production of this unit amounted to a crore of rupees out of the total turnover of Rs. 9 crores made by the company. There were some special features in the form of a delinting plant and it was the only one of its kind in Punjab. The Appellate Tribunal accepted this submission and came to the conclusion that this unit was a separate industrial undertaking entitled to relief under Section 84 of the Act. We find that on the facts found by the Appellate Tribunal the view taken is absolutely correct and finds support from the decision of the Supreme Court in Textile Machinery Corporation Ltd. v. CIT : 107ITR195(SC) . That was a case under Section 15C of the Act of 1922 and it was laid down (p. 203) I
' Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. No particular decision in one case can laydown an inexorable test to determine whether a given case comes under Section 15C or not. In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved. '
6. Some of the factors which go to make an undertaking a new industrial undertaking within the meaning of Section 15C were stated to be that the new industrial undertaking must produce result, that it should have certain number of workers engaged in manufacturing process carried on by it, and it must not be substantially the same old existing business. There should be substantial investment of fresh capital in order to enable the earning of profits attributable to that new capital.
7. In the present case, it was found by the Appellate Tribunal that thisunit was a separate and independent unit. The capital invested in it andthe production turned out was very substantial. It was an economicallyviable unit. The mere fact that it was in some way or other connected withthe business which was already carried on by the assessee would not depriveit of the exemption under Section 84, Thus, on the facts found we agree withthe view taken by the Appellate Tribunal.
8. Coming to the next question, the assessee had claimed rebate under Section 84 of the Act on profits amounting to Rs. 90,330, being equivalent to 5% of the capital employed in the aforesaid unit. In working out the capital employed, the assessee had added one-half of the profits earned in the year of account and claimed that it may be treated as part of the capital employed in this undertaking in view of the provisions contained in Rule 19(5) of the I.T. Rules, 1962. The AAC did not accept the assessee's claim since in his opinion ' that the sub-rule is not an authority for making this addition because it is nowhere so said. Moreover, when the value of the assets for the purpose of capital computation has been taken to be the opening balance and proportionate value of the additions, the profits earned during the year has already been taken into account and any separate addition on this score to the working of the capital would mean double addition. ' Hence, he excluded the aforesaid amount of Rs. 40,223 from the computation of capital employed in this undertaking. The Appellate Tribunal took a contrary view and according to it Rule 19(5) is very clear and explicit and there is no scope for any argument of implied double addition. This sub-rule specifically directs the exclusion of half of the profits and hence the Appellate Tribunal accepting the assessee's claim directed the inclusion of half of the profits in the year of account in the computation of the capital for the purpose of rebate under Section 84 of the Act.
9. After hearing counsel for the parties we are inclined to agree with the view taken by the Tribunal. The manner of computing capital employed in an undertaking or hotel for the purposes of Sub-section (1) of Section 84 is provided under Rule 19. Sub-rule (1) has classified the assets for purposes of computation of the capital employed in a new undertaking or hotel under four categories, viz. :
(1) assets entitled to depreciation, such as building, machinery, etc.,
(2) assets not entitled to depreciation, such as, raw materials, consumable stock-in-trade, etc.,
(3) assets in the nature of debts, and
(4) assets acquired otherwise than by purchase.
10. Sub-rule (2) is not relevant for the present purpose. Sub-rule (3) provides for deduction of any borrowed money and debt by the person, carrying on the business, including the debt incurred for taxation and the advance tax to be paid under the provisions of the I.T. Act. Sub-rule (4) provides that any investments the income from which is not to be taken into account in computing the profit of the business and any moneys not required for the purposes of the business shall be left out of account, Then comes Sub-rule (5), which reads as under I
' (5) For the purpose of ascertaining the average amount of capital employed in a business during any computation period, the profits or losses made in that period shall, except so far as the contrary is shown, be deemed--
(a) to have accrued at an even rate throughout the said period ; and
(b) to have resulted, as they accrued, in a corresponding increase or decrease, as the case may be, in the capital employed in the business. '
11. It would be seen that this sub-rule very clearly provides that the profits earned from a new undertaking, until the contrary is shown, arise at an even rate during the year and shall increase the capital employed. Thus, the profits are to be added to the capital while losses go to reduce the capital. A similar question had come up for decision before this court in Addl. CIT v. Hind Lamps (P.) Ltd. : 106ITR360(All) and the ratio laid down was that while computing the total capital for the purposes of Section 84, as it stood before April 1, 1968, in accordance with Rule 19(5) of the Rules, the profits derived from a new undertaking during the previous year relevant to the assessment year are to be included in determining the capital employed in the new undertaking. The rule was held to be clear and unambiguous and not capable of any other interpretation. Similar view has been taken by the Gujarat High Court in CIT v. Elecon Engineering Co. Ltd : 104ITR510(Guj) .
12. In our opinion, therefore, the Appellate Tribunal was right in holding that half of the profits of the relevant previous year was to be added for computing the average capital employed in the assessee's new undertaking under Rule 19(5).
13. Now, coming to the last question referred at the instance of the Commissioner, the brief facts are these : The assessee had constructed a large number of quarters in 1948. Those quarters were just opposite to the factory building of M/s; Modi Industries Ltd. and the intention was to let out those quarters to that concern. Soon after the construction of the quarters the premises were let out to Modi Industries Ltd. Subsequently, the assessee required some of the quarters for its own employees and admittedly in the previous year relevant to the assessment year under consideration 1/4th of the quarters were in its possession while the remaining 3/4th were under the tenancy of M/s. Modi Industries Ltd. and the assessee was receiving Rs. 27,432 per annum as rent therefor. The ITO being of the opinion that the rent charged by the assessee for the said quarters from Modi Industries Ltd. was a nominal one, issued a notice to the assessee to show cause as to why the rent which those quarters would fetch if let out in the open market should not be taken into consideration for purposes of estimating the annual letting value of the same. Pursuant to that notice the assessee sent its explanation and claimed that the rent received by it from Modi Industries Ltd. was a reasonable one. The ITO did not accept that explanation, and he estimated the annual letting value of the said quarters at Rs. 93,000. On appeal, the AAC calculated the fair rent in accordance with the provisions of Act 3 of 1947 by taking the net yield at 7% of the capital invested in the construction of those quarters which admittedly was Rs. 6,61,507. On that basis the annual letting value of these quarters came to Rs. 58,946 and proportionately the value of 3/4tbs of those quarters came to Rs. 44,209, and he substituted that figure for Rs. 93,600 which had been estimated by the ITO.
14. Before the Appellate Tribunal, the departmental representative conceded that in respect of properties covered by Act 3 of 1947, if let out under an agreement, the fair rent would be the rent agreed between the parties. Thus, in the opinion of the Tribunal, the fair rent of the aforesaid quarters would be only the rent which the assessee was receiving from Modi Industries Ltd and that should have been adopted as the basis for determining the annual letting value of the property. Accordingly, the Tribunal reduced the annual letting value from Rs. 44,209 to Rs. 27,432.
15. The annual value of the property which is the subject of the charge is defined under Section 23(1) of the Act and in so far as it is relevant for our purposes it reads as under :
' 23. (1) For the purposes of Section 22, the annual value of any property shall be deemed to be-
(a) the sum for which the property might reasonably be expected to let from year to year ; or
(b) where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in Clause (a), the amount so received or receivable :...... '
16. It would be seen that under the head ' House property ' the tax is on income. However, it is not a tax on rent but upon the inherent capacity of the hereditament to yield profit. The question that falls for consideration is as to what should be the basis for estimating the annual value of a property which is actually let out on rent and as in the present case it is not disputed that the rent received in accordance with the agreement arrived at between the parties would be treated as a fair and reasonable rent within the meaning of the U. P. (Temporary) Control of Rent and Eviction Act (U. P. Act 3 of 1947). In other words the letting out of the property is subject to limitations provided in that Act and those limitations are with regard to ejectment of the tenant and enhancement of rent.
17. The interpretation of the words ' the sum for which the property might reasonably be expected to let from year to year ' occurring in some other statutes had come up for consideration before the Supreme Court in several cases. In Corporation of Calcutta v. Sm. Padma Debi : 3SCR49 consideration of similar words occurring in Section 127(a) of the Calcutta Municipal Act (3 of 1923) was involved. That Section reads :
' The annual value of land, and the annual value of any building erected for letting purposes or ordinarily let, shall be deemed to be the gross annual rent at which the land or building might at the time of assessment reasonably be expected to let from year to 'year, less in the case of a building, an allowance of ten per cent. for the cost of repairs and for all other expenses necessary to maintain the building in a state to command such gross rent. '
18. The view taken by the Supreme Court was that in determining the gross annual rent the statutory limitation of rent circumscribes the scope of the bargain in the market and, therefore, in no circumstance the hypothetical rent may exceed the limit. It was observed that if a rent which is higher than that which can be legally demanded by the landlord and actually paid by a tenant, despite the fact that such violation of the restriction on rent chargeable by law is visited by penal consequences, the municipal authorities cannot take advantage of this defiance of the law by the landlord. Rating cannot operate as a mode of sharing the benefits of illegal rack-renting indulged in by rapacious landlords for whose rapaciousactivities the law prescribes condign punishment. The same view was taken in New Delhi Municipal Committee v. M.N. Soi AIR 1977 SC 302, where the words 'may reasonably be expected to be let from year to year' occurring in Section 3(1)(b) of the Punjab Municipal Act were under consideration and the view taken was that 'in the cases of houses or buildings, it is the reasonable expectation to let such buildings, subject to certain reasonable deductions, which governs valuation whatever may have been the origin of rating'. The decision in Corporation of Calcutta v. LIC of India, : 1SCR249 is to the same effect.
19. In Kale Khan v. Rex : AIR1950All417 , fixing an higher amount of rent by the landlord after having carried out ordinary repairs was held to be enhancement and not justified under Section 5(2) of Act 3 of 1947 and was found to be in contravention of the Act.
20. According to Sri R.K. Gulati, learned counsel for the Commissioner, Section 23(1) of the Act is a deeming provision and is based on the idea of a hypothetical tenancy. The emphasis in the sub-section is on the sum for which a property might reasonably be expected to be let from year to year. In other words, the whole concept of annual value is hypothetical tenancy and that being so the ITO was right in estimating the annual letting value of the premises in question at Rs. 96,000. Reliance has been placed on certain decisions in this behalf. In Liquidator, Mahmudabad Properties Ltd. v. CIT : 83ITR470(Cal) , at page 475, it was laid down that in the context of Sections 22 to 24 what is charged is the annual value of the property. That annual value is deemed to be the same for which the property might reasonably be expected to let from year to year and it follows that it is a deeming provision and is based on the idea of hypothetical tenancy. It was observed (p. 475) :
'It insists on the sum for which the property might reasonably be expected to let from year to year indicating thereby that it is 'the' property which is to be considered emphasising the well-known principle of rebus sic stantibus in this branch of law. In other words, the property has to be considered as it is at the time of the valuation for determination of the annual value.'
21. It was also laid down that there are certain basic conditions which are essential to bear in mind, namely, (i) that it is a hypothetical tenancy ; (2) that the property must be treated as it is and as it stands in its present condition and that a hypothetical tenant and a hypothetical landlord may take normal considerations such as giving the property even at a lower rent and making some use of it and in such consideration the question of usual arrangement between landlord and tenants about the burden of the costs of repairs of different kinds as for instance repairs to keep it wind and water tight and other repairs are also to be taken into consideration. There is another decision of the Calcutta High Court in the case of CIT v. Ganga Properies Ltd. : 77ITR637(Cal) , which was rendered under Section 9 of the Act of 1922. In that case, following the decision of the Bombay High Court in D.M. Vakil v. CIT : 14ITR298(Bom) and of the Calcutta High Court in CIT v. Biman Bekari Shaw Shebait : 68ITR815(Cal) , it was held that the income from property is an artificially defined income and the liability arises from the fact that the assessee is the owner of the property. The liability does not depend on the power of the owner to let out the property, as it also does not depend on the capacity of the owner to receive the bona fide annual value. In D. M. Vakil : 14ITR298(Bom) it was emphasised that the scheme of the I.T. Act is that the income from property which is made liable to tax is not the actual income but an artificial or statutory income as defined in Section 9 and that artificial or statutory income is the bona fide annual value of the property.
22. Our attention was also invited to another decision of the Bombay High Court in Jamnadas Prabhudas v. CIT : 20ITR160(Bom) , in which, while interpreting Section 9(2) of the Act of 1922, the same view was expressed and it was further observed (p. 169) :
' Undoubtedly, if actual rent is received, that would be a important factor for the taxing authorities to consider.'
23. Of course, it was added that that would not in every case be the proper annual value as contemplated by the Act. We would also like to refer to the decision of the Supreme Court in Nalinikant Ambalal Mody v. S. A. L. Narayan Row, CIT : 61ITR428(SC) in which his Lordship, Sarkar, Chief Justice, speaking for himself and Mudholkar J. while discussing what receipts are to be included in the total income explained as under (P. 433) :
' That all income included in total income is not chargeable to tax may be illustrated by referring to income from the source mentioned in the third head in Section 6, namely ' Income from property '. The corresponding computing section is Section 9 which says that tax shall be payable on income under this head in respect of bona fide annual value of property. It is conceivable that income actually received from the property in a year may exceed the notional figure. The excess would certainly be liable to be included in total income under Section 4. It however cannot be brought to tax as income under the head ' Other sources ' : See Salisbury House Estate Ltd. v. Fry  15 TC 266 (HL). It is an income which cannot be taxed at all, though it is included in total income as defined in Section 4.'
24. It would appear, therefore, that Section 23(1) contemplates not the actual rent received by the owner of the property, but a notional one. It is a deeming provision and requires a hypothetical tenancy to be taken intoconsideration. However, if actual rent is received, that would be an important factor for the taxing authorities to consider. It depends on the facts of each case as to whether the actual rent received can be regarded as the proper annual value as contemplated by the Act. In the present case, as we have noted above, the agreement of tenancy in respect of the premises in dispute had taken place some time in 1948-49. The actual rent received by the assessee for three-fourths of these quarters in the years under consideration was Rs. 27,432 and before the Tribunal it was conceded on behalf of the revenue that in respect of properties covered by the U.P. A'ct No. 3 of 1947, if a property is let out under an agreement, the fair rent would be the rent agreed upon between the parties. There was no such contention advanced before the Tribunal that keeping in view the provisions of the U.P. Act No. 3 of 1947, the agreed rent was not the fair and reasonable rent. In our opinion, therefore, where the letting out of a property is subject to the limitation provided under the rent control enactment, and there is nothing on the record to show that the agreed rent is not fair and reasonable, then the actual rent received by the assessee should be regarded as the fair annual letting value of the property concerned. That being so we agree with the view taken by the Tribunal. Our answers to the questions referred, therefore, are :
1. Question referred at theinstance of the assessee :
Against the assessee and infavour of the department.
2. Question referred to atthe instance of the Commissioner :
1. In the affirmative, infavour of the assessee and against the department.
2. In the affirmative, infavour of the assessee and against the department.
3. In the negative, infavour of the assessee and against the department.
25. In view of the divided success, we direct the parties to bear their own costs.