HON BLE SRI JUSTICE DILIP B.BHOSALE AND HON BLE SRI JUSTICE A.RAMALINGESWARA RAO I.T.T.A.NO.316 OF 2003 JUDGMENT: (per Hon ble Sri Justice Dilip B.Bhosale) This Income Tax Appeal by Revenue under Section 260- of Income Tax Act, 1961 (for short Act ) is directed against order of Income Tax Appellate Tribunal, Visakhapatnam Bench in I.T.A.No.78/H/96 for assessment year 1992-1993. 02. respondent-assessee is partnership Firm engaged in export of Tobacco. respondent- assessee filed return of income on 27-08-1992 admitting net income of Rs.4,78,520/-. During previous year relating to assessment year 1992-93, assessee had let out his godowns. He offered rental income for taxation under head income from business . It is case of assessee, as argued by his learned counsel, that godowns, which he had let out, were being used by him for business of export of tobacco, and whenever they were not in use, he had given them on lease to third parties and received rent therefrom. He, therefore, claimed before authorities below, on basis of Clause.3 of partnership deed, that godowns of firm were let out, as provided for in said deed and that being part of their business, rent received from lessee should be treated as income from business . It has come on record that such income of assessee for earlier years i.e. 1990-91, 1991-92 was assessed as income from property on ground that no business as such was carried on by assessee during those years. assessee had carried that order in appeal before Commissioner of Income Tax (Appeals), who decided matter in favour of assessee treating entire income as income from business . That order of appellate authority was challenged by Revenue before Income Tax Appellate Tribunal (ITAT). Based on order of Appellate Tribunal, passed for year 1991-92, assessment for year 1992-93, impugned in this appeal, was completed, treating rental income as income from property . 2.1 CIT(Appeals), in appeal filed by assessee, however, held that income from letting out of godowns should be treated as income from business and directed Assessing Officer to grant renewal of registration as firm. Feeling aggrieved and dissatisfied by order of CIT(Appeals), Revenue filed appeal before Appellate Tribunal. Tribunal confirmed order of CIT(Appeals) holding that so long character of godown is retained as godown, it should be treated as commercial asset and its rental income must be treated as exploitation of commercial asset in nature of trade. In short, order of CIT(Appeals) was confirmed by Appellate Tribunal, which is subject matter of instant appeal. 03. In this backdrop, though at stage of admitting appeal on 04-02-2004 no substantial question of law was formulated, in our opinion, following questions fall for our consideration: 1. Whether on facts and in circumstances of case, Tribunal was justified in law in holding income from letting out of godowns as income from business ? 2. Whether on facts and in circumstances of case, Tribunal was justified in not recording any finding as to entitlement of assessee for continuation of Registration as firm? 04. We have heard learned counsel for parties and with their assistance gone through judgments relied upon by parties in support of their contentions. It would be relevant at this stage to make brief reference to judgments relied upon by learned counsel in support of their contentions. 4.1 In Sultan Brothers Private Limited V. Commissioner [1] of Income-Tax, Bombay City II( ) five Judge bench of Supreme Court considered question, how income received as rent and hire is to be assessed, that is, under which section of Income Tax Act, 1922, (for short 1922 Act ) is it assessable? According to assessee in that case, entire income ought to have been assessed under Section 10 as income of business or, in alternative, under Section 12 as income from residuary source, that is, source not specified in preceding Sections 7 to 11, with allowances respectively specified in Sub- sections (3) and (4) of that Section. appellant was limited Company, which was owner of certain building constructed on Plot No.7 on Church Gate Reclamation in Bombay which it had fitted up with furniture and fixtures for being run as hotel. By lease dated August 30, 1949, assessee had let out building fully equipped and furnished to one Voyantzis for term of six years from 09-12-1946 for running hotel and for certain other ancillary purposes. lease provided for monthly rent of Rs.5,950/- for building and hire of Rs.5,000/- for furniture and fixtures. In this backdrop, aforementioned question fell for consideration of Supreme Court. One of objects of assessee-Company in Sultan Brothers Case (supra) was to acquire land and building and to turn same into account by construction and reconstruction, decoration, furnishing and maintenance of them and by leasing and selling same. Supreme Court observed that activity contemplated in aforesaid object of Company, assuming it to be business activity, would not by itself turn lease in present case into business deal. It also referred its judgment in East India Housing and Land Development Trust Ltd. V. Commissioner of Income- [2] tax, West Bengal( ) and observed that income derived by company from shops and stalls is income received from property and falls under specific head described in Section 9. character of that income is not altered because it is received by company formed with object of developing and setting up markets. Then Supreme Court considered question and observed that it is true, rent for building and hire for furniture were separately reserved in lease but that does not make two lettings separable. Then after referring to Clauses in lease, further observed that building and fixtures were to be used for one purpose, namely, for purpose of running hotel with them all together. lessee was not to remove any article or things from premises except for purposes of and in course of hotel business which latter would be for effecting repair to them or for replacing them where it was duty of lessee to do so under lease. In light of these Clauses, Supreme Court held that lease clearly established parties intention that furniture and fixtures and building should be enjoyed altogether and not one separately from other. 4.2 In result Supreme Court held that rent from building will be computed separately from income from furniture and fixtures and in case of rent from building appellant would be entitled to allowances mentioned in Sub- section (4) of Section 12 and in case of income from furniture and fixtures, to those mentioned in Sub-section (3) and that no part of income can be assessed under Section 9 or under Section 10 of 1922 Act. Sections 22, 28 and 56 of Income Tax Act, 1961 are corresponding to Sections 9, 10 and 12 of 1922 Act. 4.3 In Universal Plast Ltd. V. Commissioner of Income- [3] Tax( ), Supreme Court was dealing with case where Tribunal found that leasing of factory was not sequel to assessee s decision to go out of business in respect of subject factory and that it was just make-shift transient alternative means of commercial exploitation of commercial assets. Against this finding, Calcutta High Court after referring to various Clauses in lease agreement, held that assessee decided to go out of business as far as this particular factory was concerned, lease agreement was in fact veiled agreement for lease-cum-sale and it could not be in contemplation of assessee, at time of it entering into license agreement, to retain assets, any more as commercial asset. In this backdrop, High Court had framed question Whether, on facts and in circumstances of case, Tribunal was correct in law in holding that income received by assessee by leasing out factory was business income? This question was answered by High Court in negative-in favour of Revenue and against assessee. Supreme Court while dealing with case affirmed decision of Calcutta High Court and held that income of assessee was not assessable as business income. 4.4 This Court in Commissioner of Income-Tax. v. [4] Y.Narayana Murthy( ) considered question whether, on facts and in circumstances of case and in law, Appellate Tribunal was justified in holding that letting out godowns would amount to carrying on of business within meaning of Partnership Act disregarding decision of High Court in R.C.No.118 of 1980, dated November 29, 1984 in case of CIT [5] V. Phabiomal and Sons( ). In this case assessee had derived income from letting out godowns to Food Corporation of India (F.C.I.) for assessment years 1979-80 and 1980-81. Commissioner had taken view that income derived from letting out of godowns was assessable as income from property and not from business and further held that assessee was not entitled to registration for assessment year 1979-80 and continuation of registration for assessment year 1980-81. Accordingly, directions were issued to take status of assessee as association of persons for relevant assessment years 1979-80 and 1980-81. Consequently, Assessing Officer passed order for assessment year 1979- 80 which was upheld by Appellate Assistant Commissioner. assessing authority assessed rental income as income from house property for assessment years 1981-82 and it was upheld by Commissioner of Income-Tax (Appeals). Tribunal upheld order of Commissioner for assessment years 1981-82 that income derived from letting out godowns was assessable as income from property. It, however, took view that letting out of godowns to F.C.I. would amount to exploiting commercial asset and to carrying on of business within meaning of Partnership Act. Tribunal, therefore, held that assessee was entitled to registration for assessment years 1979-80 and continuation of registration for assessment year 1980-81. On reference, this Court held that expression business contemplates continuous activity from year to year. It was not case of assessee that it was in business of construction of godowns and letting them out from year to year either to F.C.I. or to any other interested person or persons, as case may be. Therefore, assessee was not continuing activity of construction of godowns and letting them out from year to year. There was no evidence to suggest that assessee had undertaken any such systematic business activity of construction of godowns and letting them out as business property. Thus, it was held that Assessing Officer rightly assessed income derived by assessee as that of income from property and not from business. Consequently, it was held that assessee was not entitled to registration or continuation of same in terms of Section 185 (1)(a) of Act. 4.5 I n Commissioner of Income-Tax v. Veerabhadra [6] Industries( ), this Court had taken similar view, as was taken in Y.Narayana Murthy (supra) holding single act of constructing godowns and letting it out cannot be treated as business. expression business contemplates continuous activity from year to year. There was no evidence that assessee was continuing activity of constructing godowns and letting them out from year to year. There was no material that it had constructed godown in relevant year. Therefore, income from simple letting out of godown would not be treated as business income for purpose of Income-Tax Act. When once it was not business income, question of availing of benefit under Section 185(1)(a) would not arise. 4.6 In East India Housing and Land Development Trust Ltd. (supra), Supreme Court dealt with case of Company which was incorporated with objects of buying and developing landed properties and promoting and developing markets. It had purchased 10 bighas of land in town of Calcutta and had set up market therein. question was whether income realized from tenants of shops and stalls was liable to be taxed as business income under Section 10 of 1922 Act or as income from property under Section 9. In this case, it was contended that income from letting out of godowns is business income and, therefore, assessee was entitled for registration under Section 185 (1) (a) of 1922 Act. While dealing with contention, Supreme Court observed thus: . It is difficult to accept contention of learned counsel for assessee because single act of constructing godown and letting it out cannot be treated as business. expression business contemplates continuous activity from year to year. There is no evidence that assessee is continuing activity of constructing godowns and letting them out from year to year. There is no material that he has constructed godown in this year. Therefore, income from simple letting out of godown cannot be treated as business income for purpose of Income-tax Act. When once it is not business income question of availing of benefit under section 185 (1) (a) of Act does not arise. income has to be assessed as income from property in accordance with sections 22 to 27 of Income-tax Act. We are fortified in our view by judgment of this court in Phabiomal and Sons case [1986] 158 ITR 773, wherein it was held that letting out building and realising rents therefrom did not amount to carrying on of business. It is true that Punjab and Haryana High Court in Nauharcahnd Chananram s case [1971] 82 ITR 189, took view that letting out of factory amounts to carrying on business. With respect we disagree with view expressed by Punjab and Haryana High Court. judgment in Lakshmi Company s case [1982] 133 ITR 904 (Mad), is distinguishable from facts of case. It is case where assessee went on putting up additional constructions and letting it out to various tenants which was in nature of business activity, because, as pointed out in earlier paragraph, it is case where there is continuous activity and therefore that judgment is distinguishable on facts. (emphasis supplied) 05. Learned counsel for assessee, in support of his case, placed reliance on following judgments: Commissioner of [7] Income Tax v. National Storage Pvt. Ltd. Bombay , Commissioner of Income Tax-III v. Velankani Information [8] Systems (P.) Ltd. , Commissioner of Income Tax v. [9] Information Technology Park Ltd. and Commissioner of [10] Income Tax III v. M/s.NDR Warehousing Pvt. Ltd., and submitted that income arising from letting out of godowns is income from business and not from property. 5.1 I n National Storage Pvt. Ltd. Bombay (supra), Supreme Court was considering case of distributors, who were required to store films only in godowns constructed strictly in conformity with specifications laid down in Film Rules and in place to be approved by Chief Inspector of Explosives, Government of India. assessee, after purchasing plot of land, constructed 13 units thereon. Each unit was divided into four vaults, having ground floor for rewinding of films and upper floor for storage of films. 12 units were meant for Members of Indian Motion Picture Distributors Association, who had floated Company. Income Tax Officer took view that assessee should be assessed under Section 9 of Income Tax Act, 1922, and not under Section 10 thereof. Appellate Assistant Commissioner confirmed said view. Tribunal held that income was taxable under Section 10 of said Act. When matter came up before High Court, it was held that where letting was only incidental and subservient to main business of assessee, income derived from letting will not be income from property falling under Section 9 and exception to Section 9 may also come into operation in such cases. appeal was dismissed by Supreme Court. In instant case before us, letting out of godowns is not main business of assessee and therefore, income cannot be held to be from business activity. Thus, this judgment is of no avail to assessee. 5.2 Similarly, in Velankani Information Systems (P.) Ltd., (supra) assessee was real estate developer and was in business of providing comprehensive facilities to IT industries. case in Information Technology Park Ltd., (supra) to which one of us is party (DBB, J), was also case relating to letting out buildings along with other amenities in software technology park. In M/s.NDR Warehousing Pvt. Ltd., (supra) assessee was engaged in business of warehousing, handling and transport business. Thus, facts in these cases are different and, hence, these judgments also are of no avail to assessee. 6. In present case, main business of assessee was export of tobacco and for that purpose they had constructed godowns. As submitted by learned counsel for assessee, assessee would let out godowns when they would not require same and earn rental income therefrom. Apart from letting out godowns, no other services/amenities, admittedly were extended by assessee to lessees. Merely because one of objectives, in partnership deed, was to let out godowns would not mean that assessee had undertaken activity of construction of godowns and letting them out as business activity. Moreover, it is not case of assessee that letting out of godowns was continuous activity from year to year. Therefore, in our opinion, income received by assessee, by way of rent, was income received from property and it would not fall under head income from business . character of income would not stand altered because it was received by firm with one of objects of partnership deed to let out their godowns. income derived from letting out property, in facts of present case, would not amount to profits or gains from business. In other words, income earned by letting out godowns cannot be termed or treated as income from business. From facts of present case, it is clear that assessee could let out their godowns only because those were not in use at relevant time. Therefore, rent received by assessee would have to be computed as income from property. Thus, first question framed by us is answered against assessee and in favour of Revenue, and in view thereof, second question, as submitted by learned counsel for parties, does not survive consideration. 07. Accordingly, Appeal is allowed. No order as to costs. 08. Miscellaneous Petitions, if any, pending in appeal also stand disposed of. ______________ Dilip B.Bhosale, J ___________________ A.Ramalingeswara Rao, J 11th March, 2015. sur/TSNR L.R. Copy to be marked : Yes / No [1] [ (1964) I.T.R. 353] [2] [(1961) 42 I.T.R. 49 (S.C.)] [3] (1999) 237 I.T.R. 454 [4] (2004) 270 I.T.R. 275 [5] (1986) 158 I.T.R. 773 (A.P.) [6] [(1999) 240 I.T.R. 5 (A.P.)] [7] AIR 1968 SC 70 [8] (2013) 218 Taxman 88 [9] (2014) 369 ITR 460 (Karn) [10] Judgment of Madras High Court, dated 01.12.2014 Commissioner of Income-taxpellant v. Sileman Khan Mahaboob Khan