BANGARU MANIKYAM v. INCOME TAX OFFICER
[Citation -1987-LL-0227-11]

Citation 1987-LL-0227-11
Appellant Name BANGARU MANIKYAM
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 27/02/1987
Assessment Year 1981-82, 1982-83
Judgment View Judgment
Keyword Tags new industrial undertaking • investment allowance • memorandum of appeal • plant and machinery • gross total income • business activity • capital employed • commercial asset • lease agreement • leasing company • lease income • share income • lease rent • new plant • rice mill • co-sharer
Bot Summary: On the purchase of new plant and machinery, the assessee claimed the following amounts: 1981- 1982- 82 83 Rs. Rs. 1,158 Investment 11,551 allowance under s. 32A 5,400 Allowance under s. 80HHA as per separate 2,340 4,160 statement Allowance under s. 5,440 5,695 80J as per statement 19,331 16,512 The assessment was completed under s. 143(1) allowing the above deductions. Sri K.R. Krishnamurty, the learned representative of the assessee, submitted that the assessee did not inherit the mill as a property. Having regard to rival submissions and the materials on record, we modify the order of the learned CIT. From the facts narrated before us and as per records, it appears that the assessee along with some others had purchased per records, it appears that the assessee along with some others had purchased Sri Sesharatna Rice Mill with the obvious intention of leasing out the same from time to time. The only point for consideration is whether the assessee is entitled to investment allowance when the assessee himself had admitted the income under other sources. The Tribunal is not precluded from adjusting the tax liabilities of the assessee in the light of its findings merely because the findings are inconsistent with the case pleaded by the assessee. As we have held that the lease income received by the assessee constituted business income and in the light of our discussions as detailed above, we hold that the assessee is entitled to the grant of investment allowance under s. 32A of the Act and thus reject the arguments of Shri Santhanam that the assessee is eligible for the deductions specified in s. 57. No deduction under the same section shall be made in computing the total income of a partner of the firm or, as the case may be, of a member of the AOP or BOI, in relation to the share of such partner in the income of the firm or the share of such member in the income of the AOP or BOI. In case the lessee-firm was not allowed deduction under s. 80J for the reason that it did not own the industrial undertaking, the provisions of s. 80A would not be applicable and the assessee would be entitled to claim deduction under s. 80J as co-owner-cum-partner.


G. SANTHANAM, A.M. ORDER These are appeals by assessee against order of CIT under s. 263. As common points are involved in both appeals, single order is passed for sake of convenience. 2. assessee along with seven others purchased rice mill at cost of Rs. 3,00,000 in 1972. rice mill is known as Sri Sesharatna Rice Mill, Palakol. These persons belong to two family groups. Ever since its purchase, individual holders leased mill to individuals or firms by executing lease deeds separately or jointly. assessee is one of co-owners having 13 per cent share in rice mill. 3 . For asst. yrs. 1981-82 and 1982-83, Sri Sesharatna Rice Mill was leased to firm in which assessee himself is partner. There are two lease agreements, one in respect of building and another in respect of machinery. During these years, co-owners had invested in purchase of new plant and machinery as part of expansion programme of rice mill. On purchase of new plant and machinery, assessee claimed following amounts: "1981- 1982- 82 83 Rs. Rs. 1,158] Investment (a) 11,551 allowance under s. 32A 5,400] Allowance under s. (b) 80HHA as per separate 2,340 4,160 statement Allowance under s. (c) 5,440 5,695 80J as per statement 19,331 16,512" assessment was completed under s. 143(1) allowing above deductions. CIT noticed that share income was assessed under other sources and that leasing of rice mill lock, stock and barrel did not constitute business activity, and as assessee was not carrying on any business, he is not entitled to investment allowance under s. 32A. He is also not entitled to deduction under s. 80J as lease income is only by way of rent for assets leased out and does not partake of nature of profits and gains derived from industrial undertaking. Deduction under s. 80HHA also was found to have been wrongly allowed in view of fact that assessee was only leasing out mill along with other co-owners and was never engaged in running of small-scale industrial undertaking. In this view of matter, he directed ITO to redo assessment afresh in accordance with law. 4 . Sri K.R. Krishnamurty, learned representative of assessee, submitted that assessee did not inherit mill as property. On other hand, he along with other members of two families to one of which he belongs, purchased Sri Sesharatna Rice Mill with obvious intention of leasing it out and, therefore, leasing constituted business activity in hands of assessee. This is not case of leasing out mill for temporary period after working it. cases relied on by CIT to hold that leasing is not business activity are all cases wherein asset was used as commercial asset for some time in business and then leased out after closure of business. On other hand, assessee right from beginning took up leasing as business activity and that explains manner in which assessee and other co-owners continued to lease mill from time to time, entering into lease agreements either individually or jointly. In these two assessment years, mill is under lease to partnership firm in which assessee along with some of other co-owners is partner. This scheme was better exploitation of commercial asset and assessee as partner along with some of co- owners is spending his time and devotion to improvement of lessee- partnership business. Therefore, this is not case of leasing out to some one sitting idle content with receiving rent. On other hand, this is case of leasing to firm in which assessee himself is partner continuing to exercise control and supervision over assets leased. Therefore, case of assessee is distinguishable from other cases relied on by learned CIT. As co-owners had purchased asset with obvious intention of leasing it out from year to year element of business is ever present. Business activity has not been defined and term 'business' is inclusive term and, therefore, leasing can be looked upon as business activity if carried out right from beginning without let or hindrance. He also relied on decision of Hyderabad Bench of Tribunal in ITA No. 354/Hyd. 1984, dt. 29th Aug., 1984 and also ITA No. 356/Hyd. 1984, dt. 5th Feb., 1986 in similar cases where Tribunal held in favour of assessee. 5 . Shri N. Santhanam, learned Departmental Representative, vehemently argued that assessee was not carrying on any business and his income was assessed under other sources. Under other sources, only specific deductions are permitted under s. 57. assessee is entitled to deduction in accordance with provisions of sub-cl. (ii) of cl. (a) and cl. (c) of s. 30, s. 31 and sub-ss. (1), (1A) and (2) of s. 32 and subject to provisions of ss. 34 and 35. Investment allowance falls under s. 32A which is not permissible deduction under s. 57 and, therefore, even on this ground assessee is not entitled to grant of investment allowance. In addition, he submitted that assessee never worked mill by himself. He is only co-sharer and it was lessee, viz., partnership firm which was running mill and, therefore, assessee is not carrying on any business activity as such. Investment allowance is admissible only when asset is owned by assessee and wholly used for purposes of business carried on by him. assessee as co-owner did not carry on any business. He was only collecting lease rent and enjoying his share therefrom and, therefore, there was absolutely no case for grant of investment allowance. Regarding relief under s. 80J, he submitted that profits and gains must be derived from industrial undertaking and relief is calculated as percentage on capital employed in industrial undertaking or on profits of business. assessee as co-owner did not derive any profit or gain as such from industrial undertaking and, therefore, CIT rightly withdrew relief granted. Regarding claim under s. 80HHA, he submitted that here again, assessee will be entitled to deduction only if income included profits and gains derived from small-scale industrial undertaking and conditions specified in sub-s. (2) of s. 80HHA are fulfilled. Even if it is held that Sri Sesharatna Rice Mill is small-scale industrial undertaking still assessee would not be entitled to relief because he received only lease rent and not any share in profits and gains of industrial undertaking. Finally, he took us through order of learned CIT in support of his contentions and relied on same. 6. In his reply, Shri Krishnamurty submitted that assessee might have returned income under other sources inadvertently but that should not shut him out of relief. true character of income is only business income and assessee by mistake had offered it under other sources and assessment was completed under s. 143(1). However, before placing income under other sources, first enquiry should be made under s. 56 whether that income would not fall under any of heads specified in s. 14, items to E, and then only it should be classified under other sources and not before. He further submitted that assessee had share income from lessee-firm as partner. As ITO had allowed investment allowance under s. 32A and other deductions, he is deemed to have taken lease income as business income, though such income was returned under other sources. This was consonance with mandatory terms of s. 56. Even otherwise, he is not precluded from taking plea that if true character of lease income is business income, then assessee is entitled for grant of such allowances and deductions. As matter of fact, assessee agitated true nature of income as business income before CIT in proceedings under s. 263. Shri Santhanam objected that this is new plea raised for first time before Tribunal and submitted that such plea was not raised in grounds of appeal. He railed on decision of Tribunal, Hyderabad Bench 'B', in ITA Nos. 1000/Hyd. 1985 and 291 to 294/Hyd. 1985 in order dt. 30th Aug., 1986, in support of his plea that activity of assessee did not constitute business. 7 . Having regard to rival submissions and materials on record, we modify order of learned CIT. From facts narrated before us and as per records, it appears that assessee along with some others had purchased per records, it appears that assessee along with some others had purchased Sri Sesharatna Rice Mill with obvious intention of leasing out same from time to time. This is proved by conduct of assessee right from beginning. This is not case of assessee having exploited commercial asset himself for some time and started leasing out same after closure of business. Thus, cases relied on by learned CIT are distinguishable. very business of assessee is that of leasing. assets are owned by assessee, though partly owned, as co-sharer. assets are used in business of leasing as plant and machinery were installed in leased premises. lease agreement also covers all machinery and plant installed in premises. mill is engaged in manufacturing activity as it converts paddy into rice. This is not case of idle leasing. assessee himself, as partner of lessee, is exercising control and supervision over leased property. Therefore, all conditions stipulated in s. 32A of Act are fulfilled in case of assessee. In its order in case of ITO vs. Sri Kancherla Srinath (IT Appeal No. 354 (Hyd.) of 1984 dt. 29th Aug., 1984), Tribunal applied ratio of decision in case of First Leasing Company of India Ltd. vs. ITO (1983) 3 ITD 808 (Mad.) (SB), wherein it was held that investment allowance is permissible even in respect of leased machinery. case of K. Rami Reddi & Sons relied on by Revenue is also distinguishable. In that case, godowns were constructed and leased out to Food Corporation of India and Tribunal had no difficulty in coming to conclusion that after construction was over, only activity of partners was to sit back and to realise rentals (para 9). In that view of matter, Tribunal held that no business activity was carried on when godowns were leased out and, therefore, group of persons engaged in such activity could not be treated as firm. In case before us, some of co-owners are partners in lessee- firm running rice mill. Therefore, ratio laid down in case of K. Rami Reddi & Sons will not apply to facts of case before us. 8 . only point for consideration is whether assessee is entitled to investment allowance when assessee himself had admitted income under other sources. Shri Krishnamurty contends that even though assessee had inadvertently shown income under other sources in return filed by him, true character of income is only business income and this aspect of matter was agitated before CIT in proceedings under s. 263. Therefore, this is not in any way new plea and even if it is new plea, there is no bar for him to raise this plea before Tribunal. In this connection he relied on decision of Supreme Court in CIT vs. S. Nelliappan (1967) 66 ITR 722 (SC). Shri Santhanam contends that such plea should not be entertained and as income was assessed under other sources under s. 143(1), character of income cannot be agitated before Tribunal indirectly. 9 . Having regard to rival submissions, we are inclined to uphold contention of Shri Krishnamurty. Before CIT, assessee raised plea that in facts and circumstances of his case, his activity constituted business. So, this is not new plea now raised before Tribunal. Even if it is new plea, Tribunal has got ample powers to entertain such new plea in ratio of decision of Supreme Court in case cited above, in which, as per head notes, it was held that in hearing appeal, Tribunal may give leave to assessee, to urge grounds not set forth in memorandum of appeal and in deciding appeal, Tribunal is not restricted to grounds set forth in memorandum of appeal or taken by leave of Tribunal. Tribunal is not precluded from adjusting tax liabilities of assessee in light of its findings merely because findings are inconsistent with case pleaded by assessee. Therefore, we reject contention of Shri Santhanam in this behalf. 1 0 . As we have held that lease income received by assessee constituted business income and in light of our discussions as detailed above, we hold that assessee is entitled to grant of investment allowance under s. 32A of Act and thus reject arguments of Shri Santhanam that assessee is eligible for deductions specified in s. 57. 11. Sec. 80J operated from gross total income of assessee for asst. yr. 1980-81 and s. 80-I for asst. yr. 1981-82. gross total income must include any profits and gains derived from industrial undertaking. Rice mill is certainly industrial undertaking. For purposes of s. 80J or s. 80-I, it is undertaking and not person owning it who is relevant and assessee should receive profit from industrial undertaking. Sec. 80J or s. 80-I has to be r/w s. 80A. Accordingly, in computing total income of firm or AOP or BOI, if any deduction was allowed under s. 80J or s. 80-I, etc., no deduction under same section shall be made in computing total income of partner of firm or, as case may be, of member of AOP or BOI, in relation to share of such partner in income of firm or share of such member in income of AOP or BOI. In case lessee-firm was not allowed deduction under s. 80J for reason that it did not own industrial undertaking, provisions of s. 80A would not be applicable and assessee would be entitled to claim deduction under s. 80J as co-owner-cum-partner. That part of share income derived from lessee-firm which is referable to new industrial undertaking will certainly partake of nature of profits and gains derived from industrial undertaking. Therefore, in our view, assessee is entitled to get deduction under s. 80J as co-owner-cum-partner provided other conditions envisaged in s. 80J are satisfied. CIT's order on s. 80HHA is confirmed as same was not seriously contested before us. 12. In result, appeals are partly allowed. *** BANGARU MANIKYAM v. INCOME TAX OFFICER
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