G. P. Singh, C.J. - This order shall also dispose of M.C.C. No. 334 of 1978.
2. The question of law referred in M.C.C. No. 39 of 1978 are as follows :
(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the rental income accruing to the assessee was income from house property taxable u/s 22 of the IT Act and not its business income ?
(2) Whether the expenditure of Rs. 3,000 incurred by the assessee for the upkeep and maintenance of its plant and machinery was a revenue expenditure allowable under the IT Act ?
The question of law referred in M.C.C. No. 334 of 1978 is as follows :
Whether, in the facts and in the circumstances of the case, the Tribunal was right in holding that the rental income accruing to the assessee from its godowns was not its business income and the losses incurred in the earlier years could not be carried forward and set off in asst. yr. 1966-67 ?
3. M.C.C. No. 39 of 1978 relates to the asst. yr. 1974-75 and M.C.C. No. 334 to the asst. yr. 1966-67. The assessee is a private limited company. The assessee carried on business of oil milling. From the statement of the case and the documents annexed to it in both the cases all that we can make out is that the assessee discontinued the business of oil milling in the accounting year relevant to the asst. yr. 1965-66. Thereafter it let out some of its godowns on rent which were previously essentially used for storing raw materials used in the business of manufacture of oil. The mill was not leased out at any time. The main question to be decided in these cases is whether the rental income accruing to the assessee was income from house property assessable u/s 22 of the IT Act, 1961 or income from business assessable u/s 28. The principles bearing up this question have been laid down by the Supreme Court in three cases, viz. Commr. of EPT, Bombay City v. Shri. Lakshmi Silk Mills Ltd. : 20ITR451(SC) , Narain Swadeshi Weaving Mills v. Commr. of EPT : 26ITR765(SC) and New Savan Sugar and Gur Refining Co. Ltd. v. CIT, Calcutta : 74ITR7(SC) . If the godown continued to be the business asset of the assessee and were let out as such during the relevant accounting period, the rental income would partake the character of business income. But in case it is held that the godowns had ceased to be business asset of the assessee, the rental income would be treated to be income from house property. The decisions of the Supreme Court in the aforesaid three cases show that when the assesss business has come to a close or when the assessee lets out the assets with the intention of closing the business, the property which at one time was a commercial asset would cease to be so and the income from letting out such asset would not be business income, but where the business activity is temporarily suspended and there is no intention to go out of business, the business asset will continue to be business asset and income from letting out of such an asset will be treated as business income (see Kanga and Palkhivala, 7th Edn., Vol. I, at page 345). The Tribunal in deciding the appeals out of which the two references arise has not adverted to these principles. There is nothing in the orders of the Tribunal or in the statements of the cases from which it may be possible for us to infer whether the discontinuance of business was temporary suspension of the business or whether the assessee had the intention of closing the business or had closed the business. It appears to us that the Tribunal without applying the correct principles deductible from the aforesaid decisions held that the income form letting out the godowns would be treated as income from house property and not business income. The Tribunal will have to redecide this question after bearing the appeals afresh.
4. The question whether the expenses incurred by the assessee for the up-keep of the plant and machinery was revenue expenditure allowable as a deduction would also depend upon the question whether the assessee was continuing the business by leasing out the godowns as business asset. In case it is held that the godowns had ceased to be the business asset and the income from letting out was not a business income, the expenditure incurred for the up-keep and maintenance of the plant would not be held to be revenue expenditure. But in case the rental income and income from business on the ground that the godowns continued to be business asset, the above expenditure would be treated as a revenue expenditure.
5. Similarly the question whether the losses incurred in the earlier year could be carried forward and set off in the assessment for the year 1966-67 would also depend upon the answer to the question whether the rental income from godowns was business income or income from house property. Reference in this connection may be made to Lakshmi Industries Pvt. Ltd. v. CIT, Madras : 41ITR645(Mad) and CIT, Lucknow v. Vikram Cotton Mills Ltd. (1971) 106 ITR 829.
6. For the reasons given above, we answer the questions as follows :
M.C.C. No. 39/78 :
(1) Without applying the correct test the Tribunal was not right in holding that the rental income was income from house property.
(2) The answer to question No. 2 will depend upon the answer the question No. 1 after applying the correct principles.
M.C.C. No. 34/78 :
Without applying the correct principles the Tribunal was not right in holding that the rental income was not assessees business income and losses incurred in the earlier years could not be carried forward.
The Tribunal will rehear the appeals and decide the aforesaid question after applying the correct principles in the light of the observations made above., It will be open to the Tribunal to give the parties opportunity to produce fresh evidence or material relevant to the questions. There will be no order as to costs of these references.