Bharucha, J.:— The assessee at whose instance this reference under s. 256(1) of the I.T Act, 1961, is made, is a registered firm carrying on business in the manufacture and sale of manure mixtures. It is assessed to income-tax at Poona. It constructed a godown outside the limits of the Poona Municipality. From July, 1968, till the middle of November, 1968, it used the godown for storing its raw materials, and finished products. Thereafter the godown was let out to the State of Maharashtra and the tenancy continued up to January, 1971. Thereafter, the assessee obtained possession of the godown and began using it for its own purposes. In the assessment year 1970–71, with which we are here concerned, the assessee disclosed the figure of Rs. 80,092 as income from house property against the godown rent of Rs. 1,08,300 received from the State. Thereafter, it sought to file revised returns in respect of this income from house property. The ITO held that the rent received for the godown could not be treated as income from house property and assessed it as income from other sources. The AAC, to whom the assessee appealed, held that the godown rent had to be computed as income from house property and that the annual value of the godown was Rs. 1,08,300. Against the order of the AAC, the assessee filed an appeal to the Tribunal and the ITO filed cross-objections. The Tribunal placed reliance upon the judgment of this court in CIT v. National Mills Co. Ltd., [1958] 34 ITR 155 and held that the godown rent should be treated as income from business and remanded the matter to the ITO to compute it as such after giving fresh opportunity to the assessee of being heard. In the view that they took, it was not necessary to deal with the question relating to the annual value of the godown.

2. The assessee has sought a reference and the question that we have to answer is this:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that for the purpose of charge of income-tax and computation of total income, the godown rent received by the applicant from the Government of Maharashtra during the relevant assessment year should be classified as ‘Profits and gains of business or profession’?”

3. Mr. Munim, learned counsel for the applicant, contended that the income derived from the godown was income from house property and it had to be computed on that basis. Mr. Joshi, learned counsel for the Revenue, laid stress on the fact that the godown had actually been used by the assessee for the purpose of its business. He therefore, contended that the godown was a commercial asset of the assessee and the income derived from its letting out had to be treated as income derived from business. In East India Housing and Land Development Trust Ltd. v. CIT, [1961] 42 ITR 49, the Supreme Court was dealing with the case of an assessee which was incorporated with the objects of buying and developing landed properties and promoting and developing markets. It had purchased ten bighas of land at Calcutta and had set up a market therein. The question before the court was whether the income realised by the assessee from the tenants of the shops and stalls was liable to be taxed as business income under s. 10 of the Indian I.T Act, 1922, or as income from property under s. 9 thereof. The court observed that “income derived from the shops and stalls was income received from property and fell under the specific head described in s. 9. The character of that income was not altered because it was received by a company formed with the object of developing and setting up markets.” The court approved the finding in United Commercial Bank Ltd. v. CIT, [1957] 32 ITR 688 (SC), that under the scheme of the Indian I.T Act, 1922, the heads of income, profits and gains enumerated in the different clauses of s. 6 were mutually exclusive, each specific head covering items of income arising from a particular source. The income derived by the assessee from the shops and stalls was indisputably income from property and the tax authorities were right in holding that the income was assessable under s. 9.

4. In CIT v. National Storage Private Ltd., [1963] 48 ITR 577 (Bom), this court was concerned with a case in which the assessee was a company promoted by the film distributors in Bombay to carry on the business of storing and preserving films, chemicals, cinema accessories and any articles of merchandise in the cinema industry in suitable vaults specially constructed for the purpose and equipped with all the necessary arrangements and, for that purpose, to build or construct such vaults upon lands to be purchased/leased. The assessee purchased a plot and constructed vaults which were permitted to be used by film distributors on payment of a monthly charge. The assessee rendered certain services to the vault-holders such as fire service, provision of railway booking offices and a canteen and telephone. It maintained a regular staff for running these services. The ITO took the view that the income which the assessee obtained from these activities was income from house property and not income from business. Before the Tribunal there was a difference of opinion, the majority holding that the income so derived was income from business. A reference was made to this court and it was held that the majority view of the Tribunal was right. In so holding, this court considered various applicable decisions and drew seven conclusions therefrom. Conclusions 4 and 5 are material and read thus (p. 593):

“4. If the income falls under the head ‘income from property’, which is chargeable under section 9, it has to be taxed under section 9 only and cannot be taken to section 10 on the ground that the business of the assessee was to exploit property and earn income or because the income was obtained by a trading concern in the course of its business.

5. House-owning, however profitable, cannot be a business or trade under the Income-tax Act. Where income is derived from house property by the exercise of property rights properly so called, the income falls under the head ‘Income from property’ chargeable under section 9. It is the nature of the operations and not the capacity of the owner that must determine whether the income is from property or from trade. Where the operations involved in the activity of earning income from house property are not different from those of an ordinary house-owner turning to profitable account the property of which he is the owner, the income derived is income from property chargeable under section 9 irrespective of whether the operations are carried on by a company, one of whose objects or even the sole object is to indulge in the activity of earning income from house property. Thus, where house property is given on lease or licence basis for earning income therefrom, the true character of the income derived is income from property falling under section 9. The said character is not changed and the income does not become income from trade or business if the hiring is inclusive of certain additional services such as heating, cleaning, lighting or sanitation, which are relatively insignificant and only incidental to the use and occupation of the tenements.”

5. It may perhaps be mentioned that the seventh conclusion states that if the letting is only incidental and subservient to the main business of the assessee, the income derived from the letting will not be income from property. In deriving this conclusion the court appeared to rely upon the decisions given in Jamshedpur Engineering & Manufacturing Co. Ltd. v. CLT, [1957] 32 ITR 41 (Pat) and Rohtas Industries Ltd. v. CLT, [1961] 41 ITR 524 (Pat), which were cases in which the companies concerned had constructed residential quarters for their employees and had let out the same to their employees (and in the second case, to some others) as incidental to their main business. The decision of this court was appealed against before the Supreme Court and in CLT v. National Storage Pvt. Ltd., [1967] 66 ITR 596, the Supreme Court affirmed the view taken by this court. The court held that this court was right in holding that the assessee was carrying on an adventure or concern in the nature of trade; it not only constructed vaults of special design and special doors and electric fittings, but it also rendered other services to the vault-holders; it had installed a fire alarm and had provided two railway booking offices; it also maintained regular staff. The court, quoting Viscount Finlay in Governors of the Rotunda Hospital, Dublin v. Coman, [1920] 7 TC 517 (HL), observed that “the subject which is hired out is a complex one” and the return received by the assessee was not income derived from the exercise of property rights only but was derived from carrying on an adventure or concern in the nature of trade.

6. Mr. Joshi placed reliance upon a judgment of the Calcutta High Court in CLT v. Ajmera Industries Pvt. Ltd., [1976] 103 ITR 245, wherein the court observed that it was well-settled that, if an assessee derives any income by exploitation of its commercial assets whether itself or through other agencies, such income should normally be considered to be the business income of the assessee. In the case before it the assessee derived the income from certain non-factory buildings including godowns and had let out only the surplus portion after actual user of portions for its own business. It was held that the non-factory buildings including godowns were commercial assets of the company which the company was utilising mainly for its own purposes and portions thereof were let out and the assessee exploited the same through other agencies. The income derived from such letting out of the surplus of the non-factory buildings including godowns was business income of the assessee. It was observed that the assessee was carrying on business and in the course of its trading activities it was using and exploiting the non-factory buildings including godowns which clearly constituted the commercial assets of the assessee. It was further observed that in the course of its trading activities the assessee itself had been using the said commercial assets and exploiting the major portions of the same and the surplus portion it had exploited through others by letting out the same to others and the income derived from such letting out must, therefore, be considered to be the business income of the assessee. With great respect to the learned judges of the Calcutta High Court, it appears to us that this conclusion is not quite in accord with the view expressed by the Supreme Court in East India Housing and Land Development Trust Ltd. v. CIT, [1961] 42 ITR 49. It may also be noted that in the case before the Calcutta High Court a larger portion of the non-factory buildings including the godowns appeared to have been used by the assessee itself in the course of its trading activities and only, the surplus had been let out.

7. Mr. Joshi also placed reliance on the judgment in CEPT v. Shri Lakshmi Silk Mills Ltd., [1951] 20 ITR 451 (SC). The assessee-company there was a manufacturer of silk cloth and as a part of its business it installed a plant for dyeing silk yarn. Owing to difficulty in obtaining silk yarn on account of the war, it could make no use of this plant and it remained idle for some time. Thereafter it was let out on rent. The question was whether the income so derived was profit from business and whether the assessed income liable to pay excess profits tax. The case of IRC v. Broadway Car Co. (Wimbledon) Ltd., [1946] 2 All ER 609 (CA), was considered by the Supreme Court. In that case the company carried on the business of motor car agents and repairers on land held on lease. Due to the war, the company's business had dwindled to such an extent that no more than one-third of the land was required. In the circumstances, the remainder of the land was sublet. The tax authorities determined that the income from the land so disposed of was “income received from an investment” and the court upheld this conclusion. In this regard the Supreme Court said: “In this situation it was observed that in that case they were dealing with part of the property of the company which had become redundant and was sublet purely to produce income, a transaction quite apart from the ordinary business activities of the company”. The court also observed that the analogy drawn by the counsel appearing on behalf of the assessee between the case of land and dyeing plant was, for the purpose of taxing statutes, inappropriate. They have also approved the conclusions of Atkinson J. in IRC v. Iles, [1947] 1 All ER 798 (KB), that “A patent is quite different from freehold land.” In CIT v. National Mills Co. Ltd., [1958] 34 ITR 155 (Bom), whereon the Tribunal relied, the assessee was carrying on business of manufacturing textiles and it got into financial difficulties. It was ordered to be wound up by the court and the liquidator let the plant and machinery at a monthly rent. The Tribunal held that the income derived from such letting out of plant and machinery was income from business and this court upheld that conclusion. The court observed thus (p. 160):

“It is not necessary that in order that the income of the assessee should be business income, it should be produced by the assessee utilising the business assets itself. So long as those assets are used as business assets, it is irrelevant whether the business assets are exploited and used by the assessee itself or by someone else. It is true that you have a different situation under certain circumstances. The assessee may stop doing business altogether and those assets may cease to have the character of business or commercial assets. Then, they take on an entirely different character. They become capital assets and qua those assets the assessee is not carrying on any business, but qua those assets the assessee has become their owner. As an owner the assessee may also exploit those assets and receive income. But the income which it receives is no longer business income because no business is being carried on and the assets are not business assets. In such a case, the income would be an income derived by the owner from his capital assets, and the head of income under which such income would fall for the purpose of the Income-tax Act would be section 12 and not section 10.”

8. It appears to us, having regard to the judgments to which we have adverted, that the heads of income enumerated in the Act are mutually exclusive and each specific head covers items of income arising, from the specific source. Income derived as rent from property must be computed under that specific head regardless of the fact that that property had at one time been utilised by the assessee for business purposes. Such property cannot be treated as a business asset and the rent thereof as income from business. In the case of East India Housing and Land Development Trust Ltd., [1961] 42 ITR 49 (SC), the Supreme Court has gone so far as to say that even though the income be derived by a company formed with the object of promoting and developing markets from the tenants of the shops and stalls therein, it is not income from business but is income from property. A distinction must be drawn between the letting out of land or house property on the one hand and of plant or machinery on the other. The latter are commercial assets and their exploitation, even by means of letting out, yields income from business: Income yielded by letting out the former is income from property. The income derived by the assessee by letting out the godown to the State was income derived from property and not income derived from business.

9. The Tribunal was in error in applying to the assessee's godown the observations quoted above in the National Mills Co. Ltd.'s case, [1958] 34 ITR 155 (Bom). We answer the question framed for our consideration in the negative, i.e, in favour of the assessee. Having regard to the fact that we take the view that the income must be computed under the head of income from property, the Tribunal shall consider whether the sum of Rs. 1,08,300, which was the rent actually received by the assessee, represents, the annual value of the godown within the meaning of s. 23(1) of the I.T Act, 1961.

10. The Revenue shall pay to the assessee the costs of the reference.