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Indian City Properties Limited Vs. Commissioner of Income-tax (Central), CalcuttA. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 65 of 1959
Reported in[1965]55ITR262(Cal)
AppellantIndian City Properties Limited
RespondentCommissioner of Income-tax (Central), CalcuttA.
Cases ReferredCentral Distillery and Chemical Works Ltd. v. Commissioner of Income
Excerpt:
- k. c. sen j. - indian city properties limited, calcutta, is the assessee. at it instance the following questions of law have been referred to this court under section 66(1) of the income-tax act, 1922, hereinafter referred to as the 'act'.'(1) whether, on the facts and in the circumstances of the case, the assessment of rent income of the company should be made under section 9 and not under section 10 of the income-tax act ?(2) whether, on the facts and in the circumstances of the case, the tribunal was legally justified in not allowing the depreciation on the buildings in question (3) if the answer to question no. (1) is in the affirmative, whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the proportionate remuneration payable to the.....
Judgment:

K. C. SEN J. - Indian City Properties Limited, Calcutta, is the assessee. At it instance the following questions of law have been referred to this court under section 66(1) of the Income-tax Act, 1922, hereinafter referred to as the 'Act'.

'(1) Whether, on the facts and in the circumstances of the case, the assessment of rent income of the company should be made under section 9 and not under section 10 of the Income-tax Act ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in not allowing the depreciation on the buildings in question

(3) If the answer to question No. (1) is in the affirmative, whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the proportionate remuneration payable to the managing agent in respect of their rendering services in relation to the aforesaid property was not allowable under section 9 of the Income-tax Act

(4) Whether, in the assessment years 1953-54 and 1954-55, the interest payable to Greaves Cotton & Co. Ltd. has been justifiably disallowed as a deduction under section 9(1) (iv) of the Indian Income-tax Act ?

(5) Whether, on the facts and in the circumstances of the case, in the assessment year 1955-56 a part of the interest paid to Karamchand Thapar & Bros. Ltd. for the borrowal of the sum of Rs. 13,00,000 was justifiably disallowed as inadmissible under section 10(2) (iii) of the Indian Income_tax Act ?'

In this statement of the case the purpose of the business of the assessee-company has been set out with reference to the memorandum of association, which are stated as follows :

'(i) To acquire, purchase, lease, exchange or otherwise, land, buildings and hereditaments of any tenure or description.

(ii) To develop and turn to account any land acquired by or in which the company is interested, and in particular by laying out and preparing the same for building purpose, constructing, altering, pulling down, decorating, improving, furnishing and maintaining offices, flats, houses, factories, warehouses, shops, wharves, building works and conveniences of all kinds, and by consolidating or connecting or sub-dividing properties, and by planting, paving, draining, farming, cultivating, letting on building lease or building agreement, and by advancing money to and entering into contracts and agreements, of all kinds with landords, builders, tenants and others.

(iii) To purchase for investment or resale, and to traffic in land and house and other property of anu tenure and any interest therein, and to create, sell and deal in freehold and leasehold ground rents, and to make advances upon the security of land, etc.'

The assessment years are 1951-52, 1952-53, 1953-54, 1954-55 and 1955-56. From the above clauses of the memorandum of association, it appears that the companys activities were the sale and the purchase of lands and buildings as also constructing houses for the purpose of letting them out. In pursuance of the above clauses the assessee constructed a large number of house and was dealing in lands at various places. The Tribunal has referred to the companys balance-sheet which disclosed the following heasd : (a) Fixed capital (lands and bulidings at various places); (b) Building Erection Suspence (the expences for construction of buildings not yet completed) and (c) Stocks and share (the value of stocks and shares on hand). From the balance-sheet the Tribunal found that the assessee was constructing houses for the purpose of letting them out in order to earn income from rents. It also dealt in lands and made profits out of such dealings. Stocks and securities were held for earning dividend and interest. During the cource of business the company was also carrying on activities in the sale and purchase of lands and constructed or acquired buildings and let them outi. This being the position, it was contended that the income form properties was to be taxed under the head 'business' and necessary deduction as contemplated under section 10 should be allowed. Further it was contended that the company was dealing in lands and the income from the sale of land should be brought to tax under the head 'business'. The sheet-anchor of the companys case was that although it was receiving rent income upon the letting out of its properties, the receiving of such rent should be held to be the income from some business assessable under section 10 of the Indian Income-tax Act inasmuch as such buidings were the stock-in-trade of the business. The main contention in this regard was that depreciation allowance under section 10(2)(vi) in respect of such buildings should be allowed.

The Tribuanal negatived the contention of the assessee holding that such buildings from which rent income was derived should not be considered as the stock-in-trade as under section 10(2)(vi) of the Act allowance is admissible in respect of such buildings, machinery, plant or furniture being the property of the assessee, as were used for the purpose of the business. Apart from this consideration the Tribunal held that as there was no revaluation of the stocks, assuming that the buildings were stoch-in-trade, the contention of the assessee as to the claim of depreciation allowance was not admissible. In support of this finding the Tribunal has held that the heads given in the balance-sheet 'Fixed Capital Expenditure' and 'Building Erection suspence' wre also sufficient to negative the contention of the assessee with regard to rental income from buildings. Accordingly, the Tribunal upheld the finding of the Appellate Assistant Commissioner that the income derived from rents should be assessed under section 9 and not under section 9 and not under section 10 of the Act.

For the assessment years form 1952-53 to 1955-56 the assessee paid commission to the managing agents. Under the articles of association the managing agents were entitled to a remuneration of a monthly allowance of Rs. 250 together with a commission of 10 per cent. per annum on the net profit of the company as defined in section 87C(3) of the Indian companies Act, 1913. Therefore, the managing agency commission was calculated on the basis of the net profits disclosed by the company in its accounts. The Income-tax Officer found that there was loss under the head 'business' in the assessment year 1952-53 and so, the managing agency commission was paid out of the income from property and other sources. He held that section 9 did not contemplate any deduction under this category and, therefore, on allowance under the head of managing agency commission could be allowed. Accordingly, he made a proportionate basis of the managing agency commission referable to the property income and the income from other sources. He disallowed the commission attributed to the income from properties. In all these years, the Income-tax Officer allowed the proportionate commission on the income from other sources and disallowed the commission referable to the income from property. The assessee contended that the company paid the commission on the basis of the net profits arrived at and it was not justifiable that an allocation should be made in respect of this commission on the basis of income from properties and income from business or other sources. On this point the Appellate Tribunal came to the conclusion that the net income was arrived at by considering the income from properties and income from business. Regarding the income from properties, the Act permits the allowance of expenses under certain specific heads. With regard to the business the Act also allows the granting of expenses under certain specific heads. The net income is the combined result of both these two source of income. The computation of the net income by the Income-tax Officer is the computation from two sources and, in computing the total income, the Income-tax Officer is required to adjust the income according to law. In so doing he was required to consider that the allowances under the head of property will be limited to the provisions under section 9. If the managing agents get anything for supervising the collection of rents or for maintaining the property that portion of the remuneration received by them should be considered under section 9 and not under section 10. In the present case it is not the case of the assessee that the managing agents did not render services to the company in respect of the property and, therefore, the remuneration received by the managing agents included the proportionate remuneration payable to the managing agents in respect of their rendering services in relation to the property. In such circumstances, the Income-tax Officer should, according to law, make an estimate of the remuneration received by the managing agent with respect to the services rendered for the property of the company.

For the assessment years 1953-54 and 1954-55, the assessee paid interest to Greaves Cotton & Co. Ltd. and claimed deduction for the same. Money was borrowed from this firm for the purpose of constructing a houses. The income from the newly constructed houses were exempted from the charge of tax under section 4(3) (xii). It was claimed that, although the income from the newly constructed houses were exempted from taxation and the borrowed money was utilised in the construction of those houses, the interest paid should be allowed as a deduction against the total income from property and the Income-tax Officer was not correct to hold that, since the interest referred to a loan utilised in the construction of the new houses, the income from properties which were constructed out of the borrowals. The Tribunal held that the interest could be deducted from the income of the property under section 9(1) (iv). This clause of section 9 referred to property which was subject to a mortgage or other capital charge. The income from each property would, therefore, be computed according to the provisions of section 9 and the total income under that head would be the aggregate sum of income of such properties. If a particular income from property was exempted from tax, the deduction should relate to that property and, under the law, the deduction related to one property could not be allowed as a deduction from the income of another property or from the total income under the head 'property'. In view of this finding the Tribunal held that the Income-tax Officer has correctly disallowed the deduction claimed for the interest.

In the assessment year 1955-56 the assessee claimed payment of interest of Rs. 51,885 to Messrs. Karamchand Thapar and Bros Ltd. This claim was also disallowed on the footing that the interest was payable on capital borrowed for the purpose of buildings under construction and, therefore, there was no income from the said uncompleted properties. The contention of the assessee was that there was no borrowing for properties to be assessed under section 9 and the borrowals were for the purposes of the business of the company on the footing that the activities in respect of buildings and lands were a part of the business activities. The Tribunal held that the assessee had several activities, one of which was of receiving rent from properties and that part of the income was not income from business. The second contention of the assessee was that the amount that was utilised for the purpose of the business of the assessee should be considered as capital borrowed for the assessees business and interest thereon should be allowed. In the aforesaid year of account the assessees expenditure on properties was about Rs. 13,00,000. A sum of Rs. 3.00.000 were expended for the business of the company. Accordingly, it was held that the interest on the borrowal of Rs. 3,00,000 was admissible under section 10(2) (iii) and the interest referable to the borrowal of Rs. 13,00,000 was not admissible under that section.

Question No. 1 : Then total income of an assessee is chargeable under section 3. Section 6 of Act enumerates six heads under which the income of an assessee has to be charged. Item No. (iii) provides that income from property shall be charged to income-tax. It is now the established principle of law that income which is specifically made chargeable under a distinct head cannot brought to charge under a different head in lieu of, or in addition to, being charged under its specific head. Income from properties is a specific head of charge and the tax is payable under section 9 in respect of the bona fide annual value of such property. Section 9 provides that the tax shall be payable by the assessee under the head 'Income from Property' in respect of the bona fide annual value of property consisting of any buildings or lands pertaining thereto of which he is the owner, other that such portions of such property as he may occupy for the purpose of any business, profession or vocation carried on by him, the profits of which are assessable to tax subject to the allowances as enumerated therein. It was made out on behalf of the assessee that the income on rent comes within the ambit of section 10 which provides that the tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation carried by him.' The obvious purpose of setting up such a plea is that he should be entitled to the depreciation allowance of the buildings as provided for in section 10. It has already been stated that the companys balance-sheet disclosed under the head Fixed Capital Expenditure', lands and buildings at various places, under the head 'Building Erection Suspense', the expense for construction of buildings not yet completed, and under the head 'Stocks and Shares' the value of stocks and shares on hand. The company contended that, during the course of the business, it was carrying on activities in the sale and purchase of lands constructed or acquired buildings and let them out and, therefore the income from properties was to be taxed under the head 'business' and necessary deductions as contemplated under section 10 should be allowed. We are of opinion that the Tribunals decision is correct in as much as the buildings from which rental income was obtained were not shown as stock-in-trade of the business. On the other hand, such buildings were shown under the head 'Fixed Capital Expenditure'. This being the position, it cannot be said that the assessees case in this regard should be taken out of the ambit of the provision of section 9 of the Act. In this connection reference may be made to the Income-tax Act by Kanga and Palkhivala, 4th edition at page 295. It runs as follows :

'Since a specific head of charge is provided for income from the ownership of house property, rents or other income from the ownership of house property cannot be brought to tax under any other head. Assessment under this head is not only proper but obligatory. It makes no difference that the property is let out in the course of business and the income derived from such property forms part of the profits of a trading concern; the income so derived cannot be taxed under section 10 as business income'.

In this connection reference may be made to the Supreme Court decision reported in United Commercial Bank Ltd. v. Commissioner of Income-tax. This decision was cited before us by Mr Choudhury, the learned counsel appearing for the assessee, for the purpose of showing that under Income-tax Act, 1922, the income of an assessee is one and section 7 to 12 of the Act direct the modes in which the income-tax is to be levied. By virtue of that decision, according to Mr. Choudhury, the income of the assessee in this case should be taken up together for the purpose of computation of income-tax. The decision, inter alia, runs as follows :

'No one of those sections can be treated to be general or specific for the purpose of any one particular source of income; they are all specific and deal with the various heads in which an item of income, profits and gains of an assessee falls. These sections are mutually exclusive and where an item of income falls specifically under one head it has to be charged under that head and no other.'

According to this decision it seems to us that the separate computation of income in the instant case under the head 'property' was justifiable. In this connection also the decision of Lord Radcliffe in Mitchell v. Rose may be referred to. At page 54 (bottom) his Lordship observed as follows :

'I think that it is contrary to what the Income Tax Act itself requires and I think it inconsistent with those Rules about the structure of the taxing system and its necessary implications which we conveniently associate with the speeches made in this House in Fry v. Salisbury House Estate Ltd. : Jones v. City of London Real Property Company Ltd. I do not mean, of course, that those rules originated with that decision, but they are there recognised and expressed in what I have always thought to be conclusive form. Generally speaking, the five schedules of taxable categories are distinguished from each other by distinctions as to the nature of the source from which the chargeable profits arises. The source may be property in the ordinary sense as land, securities, copyright, office, or it may be an activity sufficiently coherent, trade or profession, for example, to be regarded as itself the stock on which profits grow. That is an exhaustive account, but it is, I think, a sufficient general introduction. Before you can assess a profit to tax, you must be sure that you have properly identified its source or other description according to the correct schedule; but, once you have done that, it is obligatory that it should be charged, if at all, under that schedule and strictly in accordance with the rules that are there laid down for assessments under it. It is a necessary consequence of this conception that the sources of profit in the different schedules are mutually exclusive.'

This being the legal position, we are of opinion that the contention as raised by the assessee cannot be accepted and the case strictly falls within the ambit of section 9 of the Act. This question should, therefore, be answered against the assessee.

Question No. 2. - In view of our decision that the income derived from rents of house property does not come within the ambit of section 10 no depreciation allowance as provided for therein can be allowed and this question also should be answered against the assessee.

Question Nos. 4 and 5. - These questions are taken up together and need be considered before dealing with question No. 3. It will appear from the order of the Income-tax Officer at page 37 of the paper-book that the assessee had a building at Bombay and the same was let out to Greaves Cotton and Company Limited. Greaves Cotton required more accommodation and it was agreed upon between Greaves Cotton and the assessee that the former would construct a second storey on the building. The costs of new construction was to be charged to the assessees account and on this interest at 6 per cent. per annum was payable by the assessee-company. For the additional accommodation the company was to receive additional rent of Rs. 3,000 per month. Exemption in respect of Rs. 36,000 under section 4(3) (xii) was claimed and allowed by the Income-tax Officer. His conclusion was that interest on Rs. 13,098 paid to Greaves Cotton was in respect of exempted property and this could not be allowed as a deductible expense. The Tribunal upheld the decision of the Income-tax Officer and concluded that if a particular property is exempted under the provisions of section 4(3) (xii) from tax, the deduction related to one property cannot be allowed as a deduction from income of another property or from the total income under the head 'property.' Section 4(3) (xii) runs as follows :

'... any income chargeable under the head income from propertyin respect of a building the erection of which is begun and completed between the 1st day of April, 1946, and 31st day of March, 1956 (both dates inclusive), for a period of 2 years from the date of such completion.'

This clause was introduced in 1946 to encourage the erection of new buildings. It grants two years exemption from tax in respect of a building, the erection of which is taken and completed within the specified period. To encourage the building of business premises, there was also introduced, simultaneously with this clause, an amendment to section 10(2) (vi) granting a special initial depreciation allowance for new buildings. It is a finding of fact by the Tribunal that the case of the assessee with regard to the Bombay property comes within the ambit of section 4(3) (xii) and, therefore, the interest paid therefor cannot be taken into account for deduction of taxable income. Section 9(1) (iv) provides for the following allowance amongst others :

'Where the property is subject to a mortgage or other capital charge, the amount of any interest of such mortgage or charge; where the property is subject to an annual charge not being a capital charge, the amount of such charge; where the property is subject to a ground rent, the amount of such ground rent; and, where the property is acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital.'

Normally the assessee would have been entitled to an allowance under the head 'interest paid'. But, as stated before, the Tribunal has disallowed this allowance and has concluded that it does not come within the ambit of the foresaid section 9(1) (iv), as the newly constructed buildings for which the borrowal was made comes within the ambit of section 4(3) (xii). Now as contended by Mr. Choudhury such decision is incorrect on the ground that this ought to have been deducted from the total income of the assessee. We do not think that the contention under the existing law is correct, as where several distinct businesses are carried on, the profits of each business must be computed separately and the allowance under this clause can be claimed in computing the profits of only that business for which the capital was borrowed. Interest on money borrowed for the purposes of non-assessable business (as in the instant case) cannot be allowed against the profit of another separate business which is assessable : vide the observation in Commissioner of Income-tax v. Somasundaram Chettiar and Conville v. Commissioner of Income-tax. In view of this, it appears to us that the interest on money borrowed from Greaves Cotton and Company Limited could not be allowed as a deduction and the decision of the Tribunal in this respect appears to be correct.

Mr. Choudhury has in this connection referred us to a decision in Triuchi Varthaga Sangam Bank Ltd. v. Commissioner of Income-tax. Their Lordships of Madras High Court decided whether the provision of section 8 of the Act was applicable to the facts of the case. The facts are that the assessee, a banking company, realised in the relevant year a gross income of Rs. 1,27,688. This included a sum of Rs. 2,550 being interest on securities and a further sum of Rs. 2,500 being interest on ten-year Treasury Savings Certificates. The assessee paid Rs. 44,308.88 nP. as interest on deposits to its customers and claimed as expenses allowable under section 10(2) of the Income-tax Act, an amount of Rs. 41,701.44 nP. The proportionate part of the interest paid to the depositors on the sum of Rs. 50,000 invested in the purchase of these savings certificates worked out to Rs. 904 and the proportion of allowable expenses in this regard was Rs. 815. The Income-tax authorities disallowed these two sums on the grounds that, since the interest on these savings certificates was exempt from tax, these two sums cannot be allowed and the Tribunal also upheld the disallowance. On these facts, their Lordships held that there was nothing in section 8 to justify the disallowance of these two sum, and the disallowance of these two sums was not right in law. Their Lordship further held that where a bank receives deposits in the course of its normal banking activities, whether it purchased tax-free securities or not, the interest charges paid by it to its depositors are not apportionable and solely for the reasons that the income from certain securities was not subject to tax, an expenditure proportionate thereto could not be disallowed. The view that where an item of income comes within the scope of section 4(3) (xvii), the exemption is operative only to the extent of the income, less any allowance which would otherwise be available under section 10 or section 8, as the case may be, is not correct.

In so far as we could see, this decision does not in any way help the assessee as it was made regarding the applicability of section 8 to the particular facts of the case and section 4(3) (xii) stands on a different footing and we are of opinion that the Tribunal made a correct approach in deciding this point for the reasons given by it in favour of the department. Accordingly, question No. 4 should also be answered against the assessee.

Regarding question No. 5 it will appear that in the assessment year 1955-56 the assessee made a payment of interest of Rs. 51,885 to Messrs. Karamchand Thapar Brothers Limited. This has been disallowed by the Income-tax Officer on the ground that interest was payable on capital borrowed for the purpose of buildings under construction and, therefore, as there was no income from the said uncompleted buildings the interest charges cannot be allowed as a deduction. This is a finding of fact which cannot be distributed by this court. The contention of the assessee was that there was no borrowing for properties to be assessed under section 9 and the borrowals were for the purposes of business of the company, on the footing that the activities in respect of buildings and lands were a part of the business. It has already been found under question No. 1 that the assessee had several activities, one of which was of receiving rent from property and that part of income was not income from business. Accordingly, this part of assessees argument cannot be tenable.

The second contention before the Tribunal as also before us is that the amount that was utilised for the purpose of business of the assessee should be considered as capital borrowed for the assessees business and interest thereupon should be allowed. The Tribunal found that the contention of the assessee in this regard had some force. They came to a finding of fact to the effect that the assessee-company,s borrowals in the year account amounted to Rs. 15,87.166. In the year of account the assessees expenditure on properties was about Rs. 9,00,000 plus about Rs. 4,00,000 expended for the purchase of certain properties, thus making a total expenditure of about Rs. 13,00,000. Thus the sum of about Rs. 3,00,000 was expended for business of the company and interest on the borrowal is, therefore, admissible under section 10(2) (iii). On the basis of this decision the Tribunal sent back the case to the Income-tax Officer for determining the interest payable on this amount with a direction to allow the same against the total business income. From this finding of fact it will appear that under section 10(2) (iii) the assessee was entitled to an allowance in respect of capital borrowed for the purpose of business, profession or vocation, the amount of interest paid. Therefore, it follows that if a part of the borrowed money was spent for the purpose of business, the interest paid therefore should be allowed as a deduction, and we do not think that the Tribunal was incorrect in its decision. Therefore, this question should also be decided against the assessee.

Question No. 3. - For the assessment year 1952-53 to 1955-56 there is a common ground that the managing agency commission which was paid should be allowed in full. The articles of association, which was referred to by the Tribunal, will go to show that the managing agent is entitled to a remuneration of a monthly allowance of Rs. 250 together with a commission of 10 per cent. on the net profit of the company. The assessees contention was that the commission on the basis of net profits arrived at was paid to the managing agent and it would not be justifiable that an allocation should be made in respect of this commission on the basis of income from properties and from business, as urged before us by Mr. Choudhury appearing for the assessee. It will be found from the orders of the tax authorities that the net income was arrived at after considering the income from properties and income from business and the net income is the combined result of both these two sources of income. The Tribunal found that allocation of the managing agency commission and remuneration should be made as the allowance under the head 'property' was limited to the provision under section 9 of the Act. In the instant case, it is not the case of the assessee that the managing agents did not render service to the company in respect of the property and therefore the remuneration received by the managing agents included the proportionate remuneration payable to the managing agent in respect of their rendering services in relation to property. This is an important question for decision whether the commissioner paid to the managing agent should be spilt up, some portion being allocated to income from property and some to business. We have already decided question No. 1 in the affirmative. It is not disputed that Messrs. Karam Chand Thapar Brothers Limited are the managing agents of the company and they shall be entitled to remain and continue in the office for a period of 20 years from the 2nd December, 1946, and that they shall be entitled to the management of the whole affairs and business of the company subject to the control and supervision of the board of directors. In rendering their services as managing agents they will be entitled to a monthly allowance of Rs. 250 and a commission at 10 per cent. per annum on the net profit of the company in terms of section 87C(3) of Indian Companies Act, 1913. In the terms of the agreement, there is no provision that the commission will be paid in respect of income from 'properties' and from 'business' separately. The learned counsel appearing for both the parties could not, however, show us exactly a case on the point. Mr. Choudhury has however referred us to a decision in Birla Brothers Ltd. v. Commissioner of Income-tax. The facts of the case are different from those of the instant case. The decision was made by Harries C.J. and Banerjee J. From the head-note it appears that the assessees were a company residing in British India. Their business activities consisted of banking, money-lending, trading in commodities, dealing in shares and securities and conducting the business of managing agents of various concerns all over India. They were the managing agents of a cotton mill in the Indian State of Gwalior and during the relevant period the profits arising to the assessees from this managing agency commission were not taxed in British India by reason of section 14(2) (c) of the Income-tax Act, 1922. The assessee had a number of directors who were appointed under the articles of association and were paid a remuneration which had been fixed under those articles. The income-tax authorities contended that the proportion of the directors fees which could be properly attributable to earning the income at Gwalior should be excluded from the total of the directors fees for the purpose of assessing the taxable income. There was no finding that any portion of the fees payable to the directors or any of them was appropriated to any particular work in India or outside India. On these facts it was decided by their Lordships that as the directors fees earned and payable in British India by directors who must be deemed to carry on the assessees business in British India, these fees must be regarded as expenses of the assessees incurred in earning the income upon which they were taxed. Consequently, the assessees could deduct the whole of the remuneration paid to the directors and the income-tax authorities could not disallow a proportion attributable to earning the income in Gwalior.

On the basis of this decision it was argued by Mr. Choudhury that the conclusion arrived at by the Tribunal in the instant case was based purely on guess as there is nothing to show that any portion of the commission was paid out of the income from house property alone. Furthermore, the terms of agreement between the assessee-company and the managing agents do not specifically confer any duty to look after the property and the managing agents have been doing their job generally. In other words, the remuneration was being paid for the entire business.

Two other cases, viz., C. Parekh & Co. (India) Ltd. v. Commissioner of Income-tax and the case of Central Distillery and Chemical Works Ltd. v. Commissioner of Income-tax were cited before the Tribunal. It distinguished these decisions and found that they did not apply to the instant case as the assessee had distinct sources of income, one from the property and the other from the business. We consider that the approach by the Tribunal in this regard is correct. Accordingly, it is a matter for consideration whether the allocation by the Tribunal was justifiable or not.

It has been pointed out before that it is an admitted position that the managing agents rendered their services in managing the properties from which rental income was derived. Accordingly, the Tribunal directed that an estimate of a remuneration received by the managing agents with respect to services to the said property should be made and the assessee in that matter should be entitled to the allowance for services rendered to business only under relevant clause of section 10(2). Presumably the Tribunal thought that the assessees case with regard to commission on rents realised does not come within section 9(1) (iv) and if it does not come within this clause, it will not be entitled to deduction of the commission paid in respect of the services rendered to the property.

We are of the opinion that the decision in the case of Brila Brothers Ltd. on which reliance has been placed by Mr. Choudhury does not apply to the facts and circumstances of this case. In that case no question arose whether the managing agents rendered service to both property and business. We have decided question No. 1 against the assessee and found that the assessees case came within the ambit of section 9. In that event it appears to us that the managing agency commission received by the managing agents for rendering service to property is liable to be apportioned. Accordingly in the absence of any specific provision in section 9 for deduction of such an amount towards computation of income-tax, we are of opinion that no deduction under this allocated portion with respect to income from rent is allowable. The reasons given by the Tribunal in this regard for negativing the contention of the assessee appear to be justifiable.

To sum up, our conclusion is as follows :

1. The assessment of rent income arising out of the properties should be made under section 9 and not under section 10 of the Act.

2. When the assessment of the income derived from property is made under section 9 the question of allowing any depreciation of the buildings does not arise under section 10(2).

3. As it is not denied that the managing agents rendered services in respect of the property the remuneration paid therefore is justifiably allocated under the head 'property' within the meaning of section 9 and there being no provision for deducting the said allowance under this section it is not allowable as a deductible allowance.

4. The Tribunal rightly decided that in the assessment years 1953-54 and 1954-55 the interest payable to Greaves Cotton and Company Limited should be disallowed as a deduction under section 9(1) (iv) of the Act.

5. In the assessment year 1955-56 a part of the interest paid to Messrs. Karam Chand Thapar and Brothers Limited for the borrowals of a sum of Rs. 13,00,000 was justifiably disallowed by the Tribunal as inadmissible under section 10(2) (iii) of the Income-tax Act.

In the result, the answers to the questions referred to us our opinion are as follows :

Question No. 1. - Yes. The assessment of rent income of the company should be made under section 9 and not under section 10 of the Act.

Question No. 2. - Yes.

Question No. 3. - Yes.

Question No. 4. - Yes.

Question No. 5. - Yes.

The applicant shall pay the costs to the respondent.

Certified for counsel.

SANKAR PRASAD MITRA J. - I agree.


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