Patna H.C : Whether on the facts and in the circumstances of the case, the tribunal was justified in law in holding that the hire charges of rs. 12,195 Received by the assessee- company for letting out the plant and machinery to the contractors were not taxable ?

Counsel Appeared

B.P. Rajgarhia & s.K. Sharan, for the revenue : Dr. Debi paul, umesh pd. Singh, G.M. Mishra & miss monisha seal, for the assessee

By the court :

This is a batch of fourteen taxation cases out of which taxation cases nos. 34 To 40 of 1977 have been referred for our opinion at the instance of the cit, bihar ii, patna, and taxation cases nos. 41 To 47 of 1977 have been referred at the instance of the assessee. All these cases relate to the same assessment years, namely, asst. Yrs. 1965-66 To 1971-72, and the references have been made under s. 256(1) Of the it act, 1961 (hereafter referred to as ” the act”). Since the points involved in all these cases are identical or similar in nature, this judgment will govern all of them. In the fitness of things, however, we think taxation cases nos. 41 To 47 of 1977 be taken up first and, thereafter, taxation cases nos. 34 To 40 of 1977 can be dealt with. Six questions have been referred for our opinion out of which questions nos. 1 And 2 are at the instance of the assessee and they are identical for all the assessment years under consideration.

Questions nos. 3 To 6 which form the subject-matter of taxation cases nos. 34 To 40 of 1977, at the instance of revenue, are apart from the questions referred at the instance of the assessee which, as already observed earlier, are identical in so far as the revenue is concerned.

Question no. 3 Is the subject-matter for the asst. Yr. 1965-66 Only. Questions nos. 3 And 4 relate to the asst. Yrs. 1965-66 To 1969-70, questions nos. 3 To 5 are common for the asst. Yrs. 1965-66 To 1969-70 and question no. 6 Relates to the asst. Yr. 1971-72 Only.

2. The facts of the case are culled out from the statement of the case as submitted by the tribunal under s. 256(1) Of the act, which may well be described hereinafter. The assessee is a corporation with 100 per cent share with the government. It is a government of india undertaking. It was assessed in the status of a company. The assessee-company, namely, bokaro steel limited, bokaro steel city, was incorporated on january 29, 1964, when the certificate of incorporation was given by the registrar of companies. The object of the company was to construct and own an integral iron and steel works. During the years under consideration, construction of the factory and installation of their mains for starting the iron and steel work had not been completed and no business was started. While marching towards its goal, however, the assessee- company had reaped certain gains. There were certain receipts which the assessee grouped under ” miscellaneous income ” in the various years. These were set off by the assessee-company against the expenses of the year and the balance expenses were then capitalised. Returns were filed by the assessee-company showing nil income for each of the seven years under consideration, the ito asked for the break-up of the ” miscellaneous income ” and on examination of the same, considered that some of these receipts called for being charged to tax. There were receipts from property let out to outsiders (contractors’ employees), hire charges received from the contractors for the use of plant and equipment let out to them, interest on advances to the contractor, interest on shortterm deposits, miscellaneous income, royalty, land-rent and liquidated damages received from the contractors.

The assessee’s contention, however, was that these receipts were not taxable as these were incidental to the assessee’s business of construction and that these had gone merely to reduce the cost of construction. It was also contended that the business of the assessee- company had already commenced with its incorporation under the companies act. The ito, however, considered that the manufacturing operation of the assessee-company had not yet started, as it was still at the construction stage and that it was not correct to say that the assessee-company’s business had already started. The ito observed that there was no continuous business activity, such as, purchase of raw materials, manufacture of goods and sale of finished products and that the assessee-company had itself filed nil returns, thereby admitting that no business had been carried on during these years. The ito did not accept the assessee’s contention that the ” miscellaneous income” earned during these years was not taxable and that it should go straight to reduce the expenses which were to be capitalised. According to the ito, the receipts included therein were left to be considered and assessed under the relevant heads specified under s. 14 Of the act. He taxed receipts from property let out to outsiders under s. 22 And the other receipts as ” income from other sources “. He, however, did not charge to tax the amount received from the employees of the assessee-company for the residential accommodation allotted to them. The ito assessed the income of the assessee in the various years as under:

Asst. Yr. House interest on miscellaneo us property advances to income employees, etc.

Hire charges

1 2 3 4 5
. Rs. Rs. Rs. Rs.
1965-66 — 2,554 — 56
1966-67 31,118 6,723 — 7,224
1967-68 93,499 19,998 — 12,195
1968-69 1,54,461 26,876 — 17,913
1969-70 4,64,845 2,31,306 5 46,342
1970-71 10,08,331 14,60,289 49 182
1971-72 15,57,523 14,30,580 5,776 3,68,442

Table column continue royalty interest on land rent liquidated short term damages deposited 7 89 rs. Rs. Rs. Rs. —— — — 8,530 11,425 — — 1,22,902 55,473 8,066 — 65,799 2,15,630 89,621 — 25,928 3,24,888 93,495 39,738 13,052 2,79,625 — 35,193 6,504 2,90,450 10,28,675 10,88,773

3. Income from house property was calculated by the ito after deducting the allowances permissible under s. 22. Income from hire charges was taken at the rate of 11 per cent of the total receipts in the year. Normally, the hire charges were received for the plant and equipment let out to the contractors. This was the position in 1965-66, 1966-67, 1967-68 and 1968-69. In 1965-66, 1967-68 and 1968-69, some works were executed departmentally also for which the charges were rs. 31,690, Rs. 53,653 And rs. 78,818 In the said three years, respectively. No profit was taken on these and these were excluded from the total hire charges received in these years. In 1969-70, 1970-71 and 1971-72, the hire charges also included small rentals for chairs, air- conditioning, watercoolers, etc. The receipts of interest on advances to employees also included interest on advances to others, namely, to contractors and hindustan steel ltd., In 1970- 71 and 1971-72. The ito had allowed expenses against income from this source at rs. 600, Rs. 2,500 Rs. 3,000, Rs. 12,000, Rs. 30,000 And rs. 30,000 In 1967-68 to 1971-72, respectively.

1. In appeal against these assessments, it was contended before the aac that these receipts did not constitute ” income ” and that these had merely gone to reduce the expenses and the cost of construction. The aac, however, conceded to this plea of the assessee-company in part only. He confirmed the action of the ito with regard to receipts from property and interest from advances to employees, etc., As also on short- term deposits. But as regards the receipts from hire charges, royalty landrent, liquidated damages and miscellaneous income, the aac agreed with the assesseecompany that these went to reduce the cost of construction and, accordingly, allowed the assesseecompany’s claim in this regard.

2. The assessee-company went in further appeal before the tribunal against the assessment partly sustained by the aac while the department went in appeal before the tribunal against the relief allowed by the aac in those years.

3. As regards the receipts from property, the contention of learned counsel for the assessee was that the charges received were from the quarters given to the contractors for the residence of their staff during the period of construction and that was not income and, in any case, it was not ” income from property “. These quarters were surplus to the needs of the assessee-company and were lying vacant and the charges received, therefore, could be utilised only for reducing the cost of construction. It was further submitted that the department had not brought to tax the rent received by the assessee-company from its own employees for the quarters similarly provided to them for their residence, and that, in the same manner, the charges received from the outsiders, who were none else than the contractors employees, could also not be charged to tax by the department. In the alternative, it was argued by learned counsel for the assessee that the receipts from these outsiders could be considered as income from business only. In this connection, learned counsel for the assessee referred to the objects cl. (Y) of the assessee- company according to which the assessee-company could let out the property of the company. According to learned counsel for the assessee, letting out of the property was thus a part of the assessee-company’s business and any receipts received in connection therewith constituted business income of the assessee- company. Learned counsel for the assessee stated that the deciding factor was not the ownership of the land or the leases but the nature of the activity of the assessee and the nature of operations in relation to them and that the objects of the company must also be kept in view to interpret the activity. It was further alternatively argued that the assessee-company had provided electricity and water to the tenants. There was no municipality in the new township and these necessities were first generated or procured by the assessee-company itself and then these were provided to the tenants. It also gave fans to the tenants. According to learned counsel for the assessee, the assessee-company had thus not only provided amenities to the tenants but also certain other necessities (which could squarely be constituted as fittings and furniture) and that the assessee- company’s case was thus covered by the decision of the supreme court in the case of sultan brothers (p) ltd. Vs. Cit (1964) 51 itr 353 (sc), wherein it was held that the income from the hire of furniture and fittings should be assessed as income from other sources and that as building was not separate from furniture and fittings, the income from building also would be assessable as income from other sources. According to learned counsel for the assessee, the use of the property in the case of the assessee-company was use of a commercial asset. The revenue, however, contended that income from letting out of quarters was liable to be assessed under s. 22 Of the act and that the use by the assessee-company could be distinguished from the facts in the cases relied upon by the assessee-company. It was also stated that the power available to the assessee-company under the articles only enabled it to let out the property but that it could not alter the head under which it had to be assessed. The tribunal, for the reasons stated by it in its order dated may 25, 1975, held that the receipts from letting out property to outsiders were chargeable under s. 22 Of the act as income from property.

4. The assessee-company had stated in its application under s. 256(1) That the following common questions pertaining to this issue may be referred to this court for opinion: “(1) whether, on the facts and in the circumstances of the case, the receipts arising from the letting out of the quarters to outsiders, such as, employees of the contractors engaged in the construction of the plant can be treated as the income of the assessee and/or, in any event, should be adjusted against the cost of construction so as to reduce such cost ? (2) Whether, on the facts and in the circumstances of the case, the receipts from the letting out of the properties to outsiders, such as, the employees of the contractors engaged in the construction of the plant are to be assessed as income from property under s. 22 Of the it act, 1961, or the said income should be assessed under s. 28 Of the it act, 1961, as business income or, in any event, under s. 56 Of the it act, 1961, as income from other sources ?”

1. The cit stated in reply that no question of law arose from the order of the tribunal with regard to this issue. The tribunal, however, was of the view that a question of law did arise out of the said order of the tribunal and, accordingly, referred the aforesaid two questions to this court for opinion. These questions, as already referred to earlier, are common for all the seven years under consideration.

2. In so far as the application made by the department under s. 256(1) Of the act was concerned, there were certain hire charges received by the assessee-company from the contractors. The ito brought these to tax. The aac deleted the amount on the ground that the letting out of plant and machinery to the contractors was an integral part of the construction contract. In the departmental appeals, the tribunal confirmed the order of the aac for the reasons recorded in its order. The ito had also brought to tax certain amounts of royalty received from contractors who raised stone chips from the company’s land. The aac as well as the tribunal deleted the addition on the ground that the receipts were of capital nature. The assessee-company had also received certain miscellaneous receipts. These were brought to tax by the ito. The aac as well as the tribunal deleted the additions on the ground that the miscellaneous receipts comprising of, inter alia, recovery from the employees for cost of fans, dust-bins, charges for machine fittings, rental of water coolers, etc., Were of capital nature and if these receipts were to be considered, these were to be considered against the expenditure incurred for their maintenance. The assessee-company had also received interest from the contractors which was brought to tax by the ito. This was confirmed by the aac in appeal. The tribunal, however, deleted the addition observing that the intention of the assesseecompany in making the advances to the contractors was not-to earn interest but to ensure and see timely execution of the construction work and that the interest earned must be taken as incidental to the overall construction work and should be allowed to be adjusted against the actual expenditure by the assessee-company. The assessee-company had also received in 1971- 72 a certain sum as interest on the amount advanced by it to hindustan steel limited for supply of locomotives and the ito included this amount as income, which was confirmed in appeal by the aac. The tribunal, however, conceded the assessee-company’s case that it had returned the engines in the next year and that, therefore, there was no real income and thus deleted the addition. The department contended that the order of the tribunal on these points was not correct and, therefore, it required the tribunal to refer the following questions of law for the opinion of this court :” assessment year 1965-66 :whether, on the facts and in the circumstances of the case, the tribunal was justified in law in holding that the hire charges of rs. 56 Received by the assessee-company for letting out the plant and machinery to the contractors were not taxable ? Assessment year 1966-67 : (1) whether, on the facts and in the circumstances of the case, the tribunal was justified in law in holding that the hire charges of rs. 7,224 Received by the assessee-company for letting out the plant and machinery the to contractors were not taxable ? (2) Whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the royalty of rs. 8,530 Received from the contractor was not taxable as it was of capital nature and not revenue ? Assessment year 1967-68 :

(1) Whether on the facts and in the circumstances of the case, the tribunal was justified in law in holding that the hire charges of rs. 12,195 Received by the assessee- company for letting out the plant and machinery to the contractors were not taxable ?

(2) Whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the royalty of rs. 1,22,902 Received from the contractors was not taxable as it was capital in nature and not revenue ?

Assessment year 1968-69 :

(1) Whether, on the facts and in the circumstances of the case, the tribunal was justified in law in holding that the hire charges of rs. 17,913 Received by the assessee-company for letting out the plant and machinery to the contractors were not taxable ?

(2) Whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the royalty of rs. 65,799 Received from the contractor was not taxable as it was of capital in nature and not revenue ?

Assessment year 1969-70 :

(1) Whether, on the facts and in the circumstances of the case, the tribunal was justified in law in holding that the hire charges amounting to rs. 46,342 Received by the assessee-company for letting out the plant and machinery to the contractors were not taxable ?

(2) Whether, on the facts and in the circumstances of the case, the tribunal was justified in law in holding that the royalty of rs. 25,928 Received from the contractors was not taxable as it was of capital nature and not revenue ?

Assessment year 1970-71 :

(1) whether, on the facts and in the circumstances of the case, the tribunal was justified in law in holding that the interest received by the assessee- company on, the amount of rs. 7,50,502 Advanced to the contractors was not taxable ?

(2) Whether, on the facts and in the circumstances of the case, the tribunal was justified in law in holding that the hire charges of rs. 182 Received by the assessee-company for letting out the plant and machinery to the contractors were not taxable ?

(3) Whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the royalty of rs. 13,052 Received from the contractors is not taxable as it is of capital nature and not revenue ?

(4) Whether, on the facts and in the circumstances of the case, the tribunal was justified in law in holding miscellaneous receipt of rs. 49 As not taxable ?

(1) Whether, on the facts and in the circumstances of the case, the tribunal was justified in law in holding that the interest received by the assessee-company on the amount of rs. 14,98,993 Advanced to the contractor was not taxable ?

(2) Whether, on the facts and in the circumstances of the case, the tribunal was justified in law in holding that the hire charges of rs. 3,68,442 Received by the assessee-company for letting out the plant and machinery to the contractors were not taxable ?

(3) Whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the royalty of rs. 6,504 Received from the contractors is not taxable as it is capital in nature and not revenue ?

(4) Whether, on the facts and in the circumstances of the case, the tribunal was justified in law in holding that the interest received amounting to rs. 7,39,332 By the assessee-company on the amount advanced to hindustan steel ltd: is not taxable ? ”

Assessment year 1971-72 :

1. Copies of the orders of the ito for the asst. Yrs. 1965-66 To 1971-72 are marked annexures a1 to a-7. A copy of the combined order of the aac for these years is marked annexure-b and a copy of the combined order of the tribunal for these years is marked annexure-c and all of them form part of the statement of the case.

2. Before, however, we embark upon the questions referred to us for our opinion, the connotations of two concepts must be clearly understood and they are the connotations of the term ” income ” on the one hand and the meaning of the term ” outsiders ” (the contractors’ employees) on the other. ” Income ” has been defined in s. 2(24) Of the act which runs thus: ” 2. In this act, unless the context otherwise requires,-… (24) ‘Income’ includes— (i) profits and gains; (ii) dividend; (iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes, not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution :

Explanation.—For the purposes of this sub-clause, ‘trust’ includes any other legal obligation; (iii) the value of any perquisite or profit in lieu of salary taxable under cls. (2) And (3) of s. 17 ; (Iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid; (v) any sum chargeable to income-tax under cls. (Ii) and (iii) of s. 28 Or s. 41 Or s. 59 ; (Vi) any capital gains chargeable under s. 45 ; (Va) the value of any benefit or perquisite taxable under cl. (Iv) of s. 28 ; (Vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with s. 44 Or any surplus taken to be such profits and gains by virtue of provisions contained in the first schedule; (viii) any annuity due, or commuted value of any annuity paid, under the provisions of s. 280D; (ix) any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever ;”

12. The law is well-settled and no discordant note to the contrary has been struck so far that s. 2 (24) Is merely an inclusive statutory provision. The definition of ” income ” in this clause is not exhaustive. It is inclusive and fictionally covers things which this clause declares to include but also such things as the word signifies according to its natural import. This clause merely brings in artificial categories to the natural connotation of “income”. The object of the act is to tax “income a term of formidably wide and vague import: the word “income is an expression of elastic ambit. The world “income” is a more general term than ” profits ” or ” gains “. A receipt may be taxable as income, although it may contain no element of profit or iain. ” Profits ” or ” gains means something which is in the nature of interest or fruit, as opposed to the principal or a tree. ” Gains ” are really the equivalent of “profit”. The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. The tax is upon income, profits or gains ; it is not a tax on gross receipts. The expression ” profits ” or ” gains ” is not limited to business only but is used in the act with reference to other sources of income as well. The act describes sources of income and prescribes methods of computing income but what constitutes income it discreetly refrains from saying in so many terms. The natural import of deemed income which has been added by virtue of the fiction under s. 22 Of the act constitute income as a whole. The income need not necessarily arise from any business activity, investment or outlay, or any enforceable obligation to pay. Voluntary payments, in order to be taxable in the hands of the recipient as income, must have an origin which a practical man would regard as a real source of income. The definition of ” income ” has been approached in three decisions of the privy council. Sir george lowndes in cit vs. Shaw wallace (1932) 59 ia 206; 6 itc 178, gave the following definition if ” income ” [cit vs. Shaw wallace (supra)] : ” income………… In this act connotes a periodical monetary return coming in with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop if a field. It is essentially the produce of something, which is often loosely spoken of as ‘capital’. But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production.”

1. In maharaj kumar gopal saran narain singh vs. Cit (1935) 3 itr 237 (pc) at page 242, lord russel of killowen added the important implification to the definition as laid down by sir george lowndes in these words ;

2. In raja bahadur kamaksha narain singh vs. Cit (1943) 11 itr 513 (pc), at pages 521, 522 and 523, lord wright repeated these observations if both and remarked: “income, it is true, is a word difficult and perhaps impossible to define in any precise general formula. It is a word of the broadest connotation………… Sir george lowndes speaks of income’ being likened pictorially to the fruit of a tree or the crop of a field. But it is clear that such picturesque similies cannot be used to limit the true character of income…… Income is not necessarily the recurrent return from a definite source, though it is generally of that character. Income again may consist of a series of ” anything which can properly be described as income, is taxable under the act unless expressly exempted.” Separate receipts, as it generally does in the case of professional earnings. The multiplicity of forms which ‘income’ may assume is beyond enumeration.”

1. This then is how the act is understood to connote ” income”.

2. Coming now to the term ” outsider ” (contractors’ employees), it is ipertinent to quote what some of the famous dictionaries have had to say about it. Webster’s new collegiate dictionary defines ” outsider ” as a person who does not belong to a particular group. Webster’s universal dictionary, however, defines the term ” outsider ” as ” condition of being external to, not a member of a society, class, or of not sharing a set of ideas, beliefs, etc., And the word ” outsider ” has been defined in the same dictionary as “one who is not a member of a social or other body, community, group, etc., Specified or previously referred to “. In the new standard dictionary, the term ” outsider ” has been defined as ” one who is outside; one who is not a member of a particular set, company, association, profession, or the like; one who has no part or interest in what is going on; a stranger; intruder; …………….. The shorter oxford english dictionary defines the term ” outsider ” as ” one who is outside any enclosure, barrier or boundary, material or figurative “. While rendering our opinion on the questions involved, which are of primal importance, these connotations have to be constantly borne in mind.

3. Coming to the decision of the tribunal, some pertinent facts and reasons have to be taken special note of. The relevant facts that emerge from out of the tribunal’s order may be summarized thus. The object of the company was to construct and own an integral iron and steel works. During the years under consideration, the works had not been completed and no business was started. The receipts from property let out to outsiders (contractors’ employees), hire charges received from the contractors for the use of plant and equipment let out to them, interest on advances to the contractors, interest on short-term deposits, miscellaneous income, royalty, land rent and liquidated damages received from the contractors were the break-up of the miscellaneous income as set out in the order of the ito. The assessee’s contentions, however, were that these receipts were not taxable at all as these were incidental to the assessee’s business of construction and that these had gone merely to reduce the cost of construction, although the ito included the receipts and assessed them under the relevant heads specified under s. 14 Of the act. He taxed receipts from property let out to outsiders under s. 22 And the other receipts as ” income from other sources “. He, however, did not charge to tax the amount received from the employees of the assessee-undertaking for the residential accommodation allotted to them. The income from house property was calculated by the ito after deducting the allowances permissible under s. 22. As we have already stated at the outset, the income from hire charges was taken at the rate of 11 per cent of the total receipts in the year. Before the aac, it was contended on behalf of the assessee that these had merely gone to reduce the expenses and the cost of construction. The aac, however, accepted this plea of the assessee-company in part only. He confirmed the action of the ito in regard to receipts from the property and interest from advances to employees, etc., As also on short-term deposits. But as regards the receipts from hire charges, royalty, land rent, liquidated charges and miscellaneous income, the aac agreed with the assessee- company that these went to reduce the cost of construction and, accordingly, allowed the assessee-company’s claim in this regard. Before the tribunal, it was contended by learned counsel for the assessee that these receipts did not constitute income at all as these were incidental to the cost of construction and this, in fact, went to reduce the cost of construction only. In this connection, learned counsel for the assessee made a reference to a brochure (study on expenditure during construction period) issued by the institute of chartered accountants of india and published in december, 1970. Learned counsel for the assessee stated that he had enquired from the institute and was told that the said brochure was still regarded as an authoritative study on the subject. The brochure, aforementioned, while dealing with ” income during the construction or production period ” (item no. 8 At page 12), stated: ” similarly, interest income earned during the construction period may be offset against interest expenses incurred during this period (paragraph 8.2 Of the brochure).”

18. Learned counsel for the assessee also referred before the tribunal to item no. 11.4 At page 23 of the brochure dealing with ” expenditure on start-up and commissioning of the, project ” wherein it is observed:

19. ” The sale revenue should be set off against the indirect expenditure during the period of test runs and treated as suggested in paragraph 8.2.” It was contended on behalf of the assessee that the receipts in question could thus be utilised for reducing the cost of construction and that this could not be charged to, tax as income. Dealing then with the receipts itemwise, it was contended by learned counsel for the assessee that the charges received from the quarters given to the contractors for the residence of their staff during the period of construction was not income and that, in any case, it was not income from property. These quarters were surplus to the present needs of the assessee-company and were lying vacant and that the charges received, therefore, could be utilised for reduction in the cost of construction. It was further added by learned counsel for the assessee that the Department had not brought to tax the amount received by the assessee-company from its own employees for the quarters similarly provided to them for their residence and that, in the same manner, the charges received from the outsiders (contractors’ employees) could also not be charged to tax by the Department. In the alternative, as already stated earlier, it was contended on behalf of the assessee that the receipts from such outsiders could, at best, be considered as income from business only and in this connection, a reference was made to the objects cl. (Y) of the assessee-company, according to which the assessee- company could sell, let, dispose of or grant right over all or any property of the company. It was asserted that letting out of the property was thus a part of the assessee’s business and that any receipts received in connection therewith constituted business income of the assessee-company. The point made, in the alternative, was that in that event, it could claim for more expenses against the income as against the income treated as from property where only such expenses as were relatable to that head alone could be considered. It was focussed before the Tribunal on behalf of the assessee that the deciding factor was not the ownership of land or the lease but the nature of the activity of the assessee and the nature of operations in relation to them and that the objects of the company must also be kept in view to interpret the activity. We need not detain ourselves at the present stage over the case law referred to before and discussed by the Tribunal, because we will, on our part, be dealing with them at the appropriate time and place hereinafter. Learned counsel for the assessee further alternatively stated that the assesseecompany had provided electricity and water to the tenants. There was no municipality in the new township and these necessities were first generated or procured by the assessee-company itself and then these were provided to the tenants. The assesseecompany had thus not only provided the tenants with small houses but also other necessities which could squarely be constituted as fittings and furniture and that its case was thus covered by judicial precedents.

20. With regard to the item ” income from interest “, it was argued before the Tribunal that the facts had not been correctly brought out by the AAC. The Government had supplied deposits and funds on which interest was payable. Further, interest had also to be paid to the Russian and the Czechoslovakian Government undertakings. There were six agreements with the Russian Government undertakings and interest had to be paid to these at 10 per cent. Learned counsel for the assessee stated before the Tribunal that the Department had allowed payment of interest of Rs. 8,57,330 in 1971-72, but that similar payment made in other years had not been considered and these ought to be allowed. Another point was raised on behalf of the assessee that an amount of Rs. 7,39,232 stated to have been received as interest from Hindustan Steel Limited in 1971-72 was wrongly assessed in that year. Interest was receivable on the value of 8 locomotives supplied to them by the assessee-company. It was stated that the entry made in that year was later found to be wrong and that a contra entry was, therefore, made in the books of account of the next year. The reason for making the said contra entry was stated to be that.
Hindustan Steel Limited had replaced the said 8 locomotives by new ones and that these had ceased to be as on loan. The amount of Rs. 7,39,232 was not, in the circumstances, an income at all and that in view of the contra entry made in the next year, it ought to be excluded from its income in 1971-72. In any case, the-amount in question was never the real income of the assessee-company.

21. Learned counsel for the assessee further stated before the Tribunal that there were two other items of interest, namely, Rs. 7,50,502 and Rs. 14,93,993, which were received from the contractors as per the supplementary agreement arrived at by the assesseecompany with them. The assessee-company had supplied extra funds to the contractors. As per the supplementary agreements, the contractors were required to pay interest on the amounts paid in excess to them. Payments made to the contractors were not against their bills.

According to learned counsel for the assessee-company, the amount received as interest from the contractors on these excess payments could go only to reduce the cost of construction. As regards the receipts considered as ” income from hire charges “, learned counsel for the assessee stated that the letting out of plant and machinery to the contractors was part and parcel of the main contract and that the hire charges received from them could be considered only for reducing the cost of construction.

22. Similarly, dealing with the item of royalty, it was contended by learned counsel for the assessee-company that the amount thereof was for the use and utilisation of the stones lying on the land and that it was clearly a capital receipt and that it had to be adjusted against the total cost of construction. Similar arguments were advanced in regard to the receipt of land rent and miscellaneous income and it was claimed that the expenditure incurred ought to be adjusted against the receipts in these years. Contrary arguments were put forth on behalf of the Revenue. But, ultimately, the Tribunal came to the following conclusions: ” In the result, the appeal of the Department and the assessee stand partly allowed. The matter in the assessee’s appeal regarding the deduction for interest paid in various years stand restored to the AAC’s file. Similarly, the matter pertaining to land rent in the Department’s appeals also stand restored to the AAC’s files as discussed above.”

23. And with regard to the other points, we have already indicated earlier as to what was the view of the Tribunal.

24. Before coming down to brass tacks, we deem it fit and proper to make some observations in the context of these cases. Sometimes, our deepest intuitions are flatly contradicted concerning a strange and complex situation. A superficial reading, a perfunctory performance, remain at that level-more often than not. Fantasy and reality are not rare things lightness of touch or levity or assumption of an illogical fantasy as a mere tale is just a moment of relaxation. From such a mosaic of small details, in themselves insignificant, the dating and context has to be determined. The ” contemporary relevance ” is of great importance. The greater, then, is our obligation to be clear about the intellectual and emotional limits within which we have to handle these questions. Keeping these in mind, we shall now take note of the findings of fact arrived at by the Tribunal in different contexts beyond which findings we are precluded from travelling and traversing as is the settled law of the land. The most relevant findings need be quoted here: “In the matter before us, the, assessee-company was to embark on iron and steel manufacturing business. It constructed some quarters for its own employees. The construction of the factory was still on when some of the tenements were found to be surplus to the requirements of the assesseecompany. It let out these quarters to the contractors engaged in the construction of the township for use by their employees. The contractors were also at that time on the look out for residential accommodation for their own employees. There was an adjustment between the two situations and the adjustment was in respect of the use of the property for which rental was to be paid by the contractors.

25. Having regard to all these facts, we are of the view that in the matter before us, the receipts from letting of property to the outsiders was chargeable under s. 22 of the IT Act, 1961, as income from property and we hold accordingly.”

26. Although we have quoted this as a ‘matter of fact’ it is, in our view, an inference from the facts hereinbefore stated. Evidently, therefore, this part of the finding of the Tribunal is an inference based upon facts which may well, come within the realm of law. In the context of making advances for the purpose of earning interest, it was held that: ” The intention in making the advances was not to earn interest but to ensure easy and timely execution of the construction work. We, on these facts, feel that the interest earned must be taken as incidental to the overall construction work and should be allowed to be adjusted against the capital expenditure.”

27. In the context of charging certain money for user of the assessee’s plant and machinery, it was held that: “It was not the business of the assessee-company to let out plant and machinery to others. It permitted its use only to the contractors and for the construction work. The assessee-company charged certain money for such user of the plant and machinery. This was obviously to cover the maintenance and wear and tear expenses of the plant and machinery belonging to the assesseecompany. Such receipts had obviously to be a part of the cost of construction and could not be treated as the income of the assessee-company.”

28. While dealing with the receipts in the hands of the assessee-company on account of liquidated damages and royalty, the Tribunal held as follows : ” Taking up now the receipts on account of liquidated damages and rovalty, we feel that here also the assesseecompany must succeed. Liquidated damages are an integral part of a contract and these are received for the contractors’ contravening the terms of the contract agreement. There, is either late execution of the construction work or the work not carried out by the contractors as per the terms of the contract. Obviously, damages received for the same are part of the cost of construction.

In the case of royalty also, the payment was received by the assessee-company from the contractors for the use of stones lying on the assesseecompany’s land for construction work. The stones lying on the assessee-company’s land were the capital asset of the assessee-company and their utilisation by the contractors would be a capital receipt in the hands of the assesseecompany.

It was not the business of the assesseecompany to sell stones lying on its land. The money received was also not a profit on sale of stones. It was the conversion of a capital asset into money.

These receipts also would thus form Part of the cost of construction and would fall to be adjusted against the same.”

29. On these findings of fact arrived at by the Tribunal, obviously, the assesseecompany’s receipts from the contractors were held to be in the hands of the assessee-company, a capital receipt and not a business of the assessee-company, and they were also found to be incidental to the overall construction work and allowed to be adjusted against capital expenditure. If, therefore, on a parity of reasoning, we are persuaded to hold that the letting out of the surplus tenements to the contractors for allocation of the same to their employees were incidental to the overall construction work during the pre-business starting period, they should be allowed to be adjusted towards capital expenditure  although in the nature of receipts as in the case of liquidated damages, interest and so on. The moot question before us to be determined, therefore, would be as to whether the letting out of the surplus quarters or the tenements to the contractors for allocation of the same to their employees were incidental to the overall construction work; whether they should be treated as income taxable under any head or merely treated as connected with the erection of the buildings for the purpose of the installation of machinery and its equipment for starting the business of the company and whether such receipts should be treated as reduction of capital expenditure f or the setting up of the business with which the assessee-company was concerned. We have to test this proposition as a matter of first impression, although Dr. Paul invited our attention to a decision of the Delhi High Court which has subsequently come out and it is reported as Addl. CIT vs. Indian Drugs and Pharmaceuticals Ltd. (1983) 141 ITR 134 (Del).

30. That the receipts in the hands of the company from the contractors for letting out some of the tenements to its, employees should not be treated as income under any head to be taxable as Such as it must be treated as merely a reduction of the capital expenditure for setting up of the business of the assessee-company, was the main plank of the submissions of Dr. Paul, learned counsel appearing for the assessee. In our view, it does not stand to reason as to why when the receipts in the hands of the assessee-company by way of liquidated damages and interest, etc., which have been treated as incidental to the setting up of the business, have been exempted from income-tax by the Tribunal as being of capital nature, the receipts from contractors for the use and occupation of some of the tenements for letting them out to the contractors’ employees, who were engaged in the work of setting up of the business, namely, the erection of plant and equipment, etc., and the buildings of the township would bring about any difference in principle at all. For dealing with this aspect of the matter, a catena of decisions was cited before us by learned counsel for either party with which we shall deal at the proper place hereinafter. The first case that was relied upon by Dr. Paul for the assessee was that of JamshedpurEngineering and Machine Manufacturing Co. Ltd. vs. CIT (1957) 32 ITR 41 (Pat). In that case., the assessee- company which carried on the business of manufacturing and selling agricultural implements had constructed residential quarters for its employees and let out the quarters to its employees as incidental to its main business. The assessee incurred expenditure for the repair and maintenance of the residential quarters. On these facts, Ramaswami C.J., speaking for the Bench, held that as the letting out of the residental quarters was subservient to and incidental to the main business, s. 9 of the Indian IT Act, 1922, did not apply and the expenditure incurred by the assessee for the repair and maintenance of the residential quarters was allowable as a deduction from the profits of the business of the assessee. Of course, in this case, this Court was dealing with the allowable deduction of the assessee. All the same, it was held that the letting out of the residential quarters was subservient to and incidental to the main business. In principle, therefore, whether it be an allowable deduction for the repair and maintenance of the residential quarters or it be a receipt in the hands of the assessee for letting out the residential quarters being subservient to and incidental to the main business would make
no difference. This decision of this Court was approved by another Bench decision in the case of Rohtas Industries Limited vs. CIT (1961) 41 ITR 524 (Pat). In that decision also, Ramaswami C.J. was speaking for the Bench. There was a slight difference between the facts of the case of Rohtas Industries Limited (supra) and the case of Jamshedpur Engineering and Machine Manufacturing Company (supra). The facts of Rohtas Industries Limited’s case (supra), were that the assessee- company which carried on the business of manufacture and sale of cement, sugar, paper and pulp and certain chemical products owned certain buildings and residential quarters around its factories, most of which it let out to its employees and some to outsiders. The company allotted the premises according to, the status of the employees and collected rent from them. In its turn, the company granted house rent allowance to the employees and the rent charged from them was set off against the allowance and where the allowance exceeded the rent, the difference was paid in cash to the employees. There was no compulsion upon the employees to stay in the buildings owned by the company. During the accounting year relevant to the asst. yr. 1948-49, the company realised by way of rent a sum of Rs. 42,322 from the employees and a sum of Rs. 10,157 from outsiders. The company conceded that as regards rent from the buildings let out to outsiders, the assessee’s income should be computed and assessed under s. 9 of the Indian IT Act, 1922, but it was contended that the rent realised from the employees of the assessee-company was assessable under s. 10 of the 1922 Act. Firstly, the observations in this regard were ex concessions, but over and above that, the period with which this Court was concerned in Rohtas Industries’ case (supra), was after the commencement of the business of the company. All the same, it was held at page 527 of 41 ITR that the amount of rent realised by the assessee for the occupation of the residential quarters had been bifurcated in the case and the statement of the case showed that the rent realised from the employees was Rs. 42,322 and the rent realised from outsiders was Rs. 10,157.

In such circumstances, it was held that it was, therefore, clear that the amount realised from the employees was severable and could be separately calculated from the rent realised from outsiders. So far as the residential quarters occupied by the employees were concerned, it was manifest that the letting out of these residential quarters by the assessee was incidental to the main business of the assessee and so the assessment should be made under s. 10 of the 1922 Act. Therefore, in principle, this Court agreed that the quarters occupied by the employees of the assessee were incidental to the main business of the
assessee and assessment should be made under s. 10 of the 1922 Act and it was not disputed by learned counsel for the assessee that in respect of the rent realised from the outsiders, the assessment should be made under s. 9 of the 1922 Act. Even so, this Court held ultimately that [(1961) 41 ITR 524] : “In our opinion, the principle laid down by this High Court in Jamshedpur Engineering and Machine Mfg . Co. Ltd. vs. CIT (supra) governs the present case.”

Applying the principle laid down in the case, it was held that [(1961) 41 ITR 524]:

“.. …… in the facts and circumstances of the present case, the rent realised by the assesseecompany from the buildings of which it is the owner and which have been let out to its employees is assessable under s. 10 of the Indian IT Act and not under s. 9 of the Indian IT Act.”

1. Be that as it may, the principle as laid down in the case of Jamshedpur Engineering and Machine Manufacturing Company Limited (supra) was approved and relied upon by this Court in the case of Rohtas Industries Limited (supra). It would bear repetition, and we think it worthwhile so to do, that this was a case in which this Court was seized with a period after the commencement of the business. In the instant case before us, we are dealing with the receipts in the hands of the assessee from the contractors for the accommodation of their employees during the pre-business period for expediting the erection of the plant and equipment and construction of the township. This makes all the difference. The pertinent question to be posed here is whether the company was carrying on the business of house letting during the prebusiness period or not, or the receipt was merely incidental to expedite the installation of plant and machinery and the building of the township for the purpose of starting its business, thereby going to reduce the capital expenditure for the purpose of the setting up of the business itself.

2. Dr. Paul invited our attention to a decision of the Supreme Court in the case of Nalinikant Ambalal Mody vs. S. A. L. Nayayan Row, CIT (1966) 61 ITR 428 (SC). That case was also dealt with the provisions of the 1922 Act. In that case, the Supreme Court held that (vide headnote); “(i) Whether an income falls under one head or another has to be decided according to the common notions of practical men, for the Act does not provide any guidance in the matter. The question under which head an income comes cannot depend on when it was received.. If it was the fruit of professional activity, it has always to be brought under the fourth head irrespective of the time when it was received.

There is neither authority nor principle for the proposition that an income arising from a particular head ceases to arise from that head because it is received at a certain time ……

(iii) There is no warranty for the assumption that whatever is included in total income under s. 4 must be liable to tax. Sec. 3 does not provide that the entire total income shall be chargeable to tax. It says that the chargeability of an income to tax has to be in accordance with, and subject to, the provisions of the Act. The income has, therefore, to be brought under one of the heads in s. 6 and can be charged to tax only if it is so chargeable under the computing section corresponding to that head. Income which comes under the fourth head, that is, professional income, can be brought to tax only if it can be so done under the rules of computation laid down in s. 10. If it cannot be so brought to tax, it cannot be brought under the residual head ‘Income from other sources’ and it will escape taxation even if it be included in the total income under s. 4. (iv) The words if not included under any of the preceding heads in s. 12 refer to income and not to a head of income. Sec. 12, therefore, deals with income which is not included in any of the preceding heads. If the income is so included, it falls outside s. 12. Sec. 12 does not say that an income which escapes taxation under a preceding head will be computed under it for chargeability to tax. ”

1. This decision, on principle, does favour the contention of learned counsel for the assessee.

2. It is of no use multiplying decisions cited at the Bar since we have now got a direct decision on the point of the Delhi High Court in D.L.F. Housing and Construction (P.) Ltd. vs. CIT (1982) 29 CTR (Del) 199 : (1983) 141 ITR 806 (Del). In that case, the assessee-company carried on the business of colonisation, that is, it used to purchase lands mostly agricultural, situate in villages contiguous to the city of Delhi and develop and sell them as commercial or residential plots. During 1950 to 1956, the assessee purchased lands in two such villages and developed them into a residential colony. Subsequently, during October 26, 1956, to April 20, 1957, the assessee, in the course of its business, also purchased about 300 bighas odd of agricultural land and raised an agricultural farm thereon. The land was shown by the assessee in its accounts under the head ” Stock-in-trade “. It did not take any steps to develop the land in question and carve out plots. Substantial amounts were spent on the agricultural farm and agricultural income was also received therefrom. Out of this land, the Government compulsorily acquired nearly 300 bighas by a notification dated September 3, 1957, and compensation of Rs. 7,90,548 was paid to the assessee in the accounting period ending September 30, 1960. A profit of Rs. 1,65,660 resulted to the assessee. The Tribunal held that the land was a trading asset and the profit bore the character of income but it represented agricultural income and was, therefore, exempt from tax. On a reference to the High Court, the High Court held that though there was evidence to support the finding of the Tribunal that the purchase of the land was in the normal course of the assessee’s business,
with a view to developing it and realising profits, this solitary circumstance was not decisive of the question whether the profit realised from the acquisition was a capital receipt or was on revenue account. Even the fact that the entry with respect to the excess amount received by the assessee by way of compensation had been shown under the head ” Stock-in-trade ” was of no effect. Since at no stage the assessee had made any attempt to convert or alter the character of the land and had used it for agriculture alone, it was not a trading asset and the compensation received was a capital receipt and the profit resulting was not assessable to tax as profit of the assessee’s business. It was further held that the compensation received by the company was neither ” rent ” nor ” revenue ” as contemplated by s. 2(1) of the Indian IT Act, 1922, and the profit realised was not ” agricultural income ” exempt under s. 4(3)(viii) as the amount was not income at all. Capital gain arising from the sale, exchange, relinquishment or transfer of agricultural land which is not a capital asset as envisaged by s. 12B will not fall within the ambit of even the extended definition of ” income ” in s. 2(6C). The assessee- company spent a sum of Rs. 89,710 towards renovation and re- construction of a house let out to its managing director on rent. The Tribunal held that it would be fair and reasonable to take one-half of the building as occupied for the purpose of the company’s business and allow about one-half of the amount towards repairs and that the balance was not allowable as a deduction. It was held by the High Court that in the absence of material on record to suggest that the motivation of letting out a portion of the building to the managing director was for facility of business in the sense that it was essential for better management and control of the assessee’s business, the view taken by the Tribunal was correct. Buildings let out to the employees of the assessee may be said to be occupied by the assessee-owner for the purposes of his business envisaged in s. 9 only if there is material to show that such occupation of the employees is incidental and subservient to the business of the assessee.

3. In the instant case, we have already held that the occupation of the assesseecompany’s contractors’ employees is incidental and subservient to the business of the assessee-company. If that be so, it cannot be chargeable to tax under any head of income.

All the questions referred to this Court, therefore, are answered in favour of the assessee and against the Revenue. A consolidated sum of Rs. 1,000 only shall be paid as costs to the assessee by the Revenue.

[Citation : 170 ITR 522]