The Judgment of the Court was delivered by

Satyanarayana Rao, J.:— The Income-tax Appellate Tribunal has referred to us the following question for decision:

“Whether in the circumstances of the case and under the provisions of the Excess Profits tax Act, a portion of the capital cost of the buildings proportionate to the portion of the business premises leased to others could be excluded from the computation of capital employed in the business of the company.”

2. The chargeable accounting period with which we are now concerned in this reference is the period from 1-1-1944 to 31-12-1944. The relevant facts appear in the statement of the case and are not seriously in dispute. The assessee company had an old building known as “Parrys old building” in which it was carrying on its business. To meet its growing needs and with a view perhaps to expand its business, the construction of a new building now known as “Dare House” was commenced in 1938 and was completed in 1941 at a cost of Rs. 6,80,000. Out of the amount required for the construction of the new building a sum of five lakhs of rupees was raised by debentures. Even before the completion of the building, the directors by a resolution passed by them in 1940 decided to let portions of the old and new buildings to different persons for an aggregate rent of about Rs. 3000 per mensem. This resolution was not referred to in the statement of the case; but it was read before us by Mr. Rama Rao Sahib, learned counsel for the commissioner of Income-tax and was not disputed on behalf of the assessee. After completing the construction of the building the assessee company occupied only about a half of the building for its business and used one hall of the old building as its godowns. One half of the new building and one half of the old was let out to various persons in pursuance of the resolution of the directors of the year 1940. From 1941 till the date of the present dispute, the assessee paid income-tax on the rents realised from both the buildings on the basis of income from house property under Section 9 of the Income-tax Act and did not claim that the rents realised from the two buildings should be included in the computations of the profits of the business for the purpose of Excess Profits Tax Act and the assessee did not claim even that in the computation of capital employed for the purpose of Excess Profits Tax Act the costs of both the buildings should be taken into consideration and should not be excluded. During the present chargeable accounting period, however, it was claimed on behalf of the assessee that the rental income should be treated as part of its profits of business for the purpose of the Excess Profits Tax Act and that half the cost of both the buildings forms part of the capital employed in the business of the company. The object of the assessee in advancing this contention is to increase the amount of the standard profits and to decrease the taxable profits. If there is an increase of capital in the chargeable accounting period, the amount of profits to be added to standard profits in adjusting the standard profits would increase as the amount of profits as to be added has to be calculated at 8 per cent, on the increased capital (the previous capital plus the additional capital). The contention of the assessee, however, was not accepted by the department and also by the appellate tribunal.

3. The real point therefore for consideration is whether the exclusion by the Excess Profits Tax Officer a portion i.e, 50 per cent of the cost of the buildings owned by the company in computing the capital is justified.

4. It has been urged before us by Mr. Subbaraya Aiyar learned counsel for the assessee that the erection of the new building and letting it out should be considered as part of the business activities of the assessee company as the building was essential for the expansion of its business. In anticipation therefore of the future needs of the company and for the purpose of its business, it was urged the building was constructed. The entire building could not be occupied by the assessee company, it is stated for two reasons. One was the requisition by the military authorities of a portion of the building and the other was that owing to the conditions of war during the period the business of the assessee could not be expanded. It is not necessary to dispute the correctness of the reasons which prevailed with the assessee company in not occupying the entire buildings for the purpose of their business. If the assessee is able to establish that really the erection of the building and the letting of the portion of the buildings not occupied by it, was part of the “business” of the assessee company within the meaning of the Excess Profits Tax Act he would succeed.

5. The definition of business in the Excess Profits Tax Act is different from that contained in the Income-tax Act. Section 2(5) of the Excess Profits Tax Act contains the definition of “business.” The two provisos in the definition are relevant and they alone are set out below:

6. They are:

“Provided that where the functions of a company or of a society incorporated by or under any enactment consist wholly or mainly in the holding of investments, or other property, the holding of the investments or property shall be deemed for the purpose of this definition to be a business carried on by such company or society.

Provided further that all businesses to which this Act applies carried on by the same persons shall be treated as one business for the purposes of this Act.”

7. The first proviso, it will be seen, applies only to a company or a society incorporated under an enactment and has no application to individuals. If the functions of a company consist wholly or mainly in the holding of property, the holding of property shall be deemed for the purpose of the definition to be a business carried on by such company and the income earned thereby would be its profits. It would, therefore, be seen from the first proviso that it expands the scope of the main definition by including in the definition of business of a company the functions of holding property and earning income or profits by the utilisation of such property. The second proviso treats as one unit several businesses of a company. For the purposes of the Act, therefore, all the businesses of a company should be treated as one single unit. This proviso will have a bearing in interpreting the Rule 4(4) of Schedule I. It must be remembered in this connection that under Section 9 of the Income-tax Act, provision is made in respect of income from buildings or lands appurtenant, to the buildings other than such portion of the property which may be occupied by the assessee for the purpose of his business, profession or vocation; but for the proviso income from property would not to any extent form part of the profits of a business of a company for the purposes of Excess Profits Tax Act. The scope of the proviso is to allow the income from property to be taken into consideration in a case where the property is owned by a company as part of its business and which is utilised to earn profits.

8. Schedule I, Rule 4, Sub-clause (4) provides that in the case of a ‘business’ which consists ‘wholly’ or ‘partly’ in the letting out of property on hire, the income from the property shall be included in the profits of the business whether or not it has been charged to income-tax under Section 9 of the Income-tax Act of under any other section of that Act. Here again it will be noticed that the business consists wholly or partly in letting out of property on hire and in such a case the income is treated as part of the profits of a business for the purposes of Excess Profits Tax Act. On a cursory reading the proviso to S. 2, Sub-clause (5) and Sub-clause (4) of Rule 4 of schedule 1 at first sight, it might appear that there is a conflict between the proviso and the Sub-rule, for in the proviso it is stated that the function of a company should consist ‘wholly’ or ‘mainly’ in the holding of the property whereas in Sub-clause 4 the Business consists wholly or partly in the letting out of property. That the main purpose should be the holding of the property is not emphasised in Sub-rule 4 of Rule 4. As pointed out by Mr. Ramarao Sahib learned counsel for the Commissioner of Income-tax, there is a way, and I think a very reasonable way, of reconciling the two provisions, if the second proviso to Sub-clause (5) of S. 2 is kept in mind. The second proviso treats as one business all the businesses of an assessee and it is for that reason in Sub-rule 4, the word “partly” is used. If a business consists of several businesses it will be an act description to treat one of such businesses ‘as part’ of the business as all the businesses are treated as one unit. The Sub-rule, therefore, cannot be construed as if the requirement of proviso that it should wholly or mainly should be the holding of the property for the purpose of the business has not been adopted in the rule. The word “business” used in Sub-rule 4 must be defined and understood in the sense in which it is used in the definition read along with the proviso. These are the relevant provisions upon the application of which to the facts of the present case the answer to the question referred to us depends.

9. The main argument of Mr. Subbaraya Aiyar learned advocate for the assessee is that the memorandum of association of the company authorises the company to acquire real or personal property and to sell, dispose of or otherwise deal with the undertaking of the company or any part thereof upon such terms as the company may think fit and to sell, improve, manage, develop, exchange, lease, dispose of, turn to account, or otherwise deal with all or any part of the property and that therefore the construction of the buildings, and the letting-of the buildings for rent is part of the business of the company and therefore the capital invested for the construction of the building and the income derived therefrom must be taken into consideration for the purpose of arriving at the capital and the profits under the Excess Profits Tax Act. It is rather difficult to accept this contention in view of the language of the memorandum of association. The right to purchase, take on lease or in exchange or on hire or otherwise acquire any real or personal property is restricted by Clause (k) of the Memorandum of Association only ‘for the purpose of its business’ and therefore it cannot be said that the acquisition of the property constitutes a business of the company within the meaning of the memorandum of association. Acquisition of property for the purposes of the business is different from acquiring property as the business of a company. The power in Clause (e) to sell, dispose of or otherwise deal with etc. relates to the undertaking of the company as well as dealing with any part of the property and rights of the company; that is to say, it is open to the company to lease out as part of their business any of their undertaking or any portion of their business or any of the property which it is using for the purpose of and as part of its business such as machinery, plant, etc. The mere construction of a building for the purpose of their own occupation which was not intended to be let to others as its business is not within the articles of the memorandum of association and is not within the objects for which the company was incorporated. The object of the company was to do other kinds of business and the acquisition of property to deal in it or earn profits by it is not within the objects. It is rather difficult to read into these clauses of the memorandum of association a power in favour of the assessee company to construct houses for the purpose of letting them out as part of its business. It is open to them to construct buildings for purpose of their own business and for their own occupation and as incidental to such business. It is not within the objects of the company and it is not part of its business to construct buildings for the purpose of letting them out for rent.

10. In the course of the arguments, certain decisions were referred as throwing light on the question when exactly the letting of property such as houses can be treated as constituting business within the meaning of Section 10 of the Income-tax Act or within the meaning of the Excess Profits Tax Act.

11. In the Commr. of Income-tax, Madras v. Gin and Rice Factory, Guntur’, 50 Mad 529, a Special Bench consisting of Sir Murray Courts-Trotter, C.J, Krishnan and Beasley, JJ., had to consider the question whether the leasing of a factory along with its machinery and plant for rent is a business within the meaning of Section 10 of the Income-tax Act and whether the assessee was entitled to claim certain deductions for loss due to depreciation. If it is treated as property and the income is assessed to tax as such, the assessee would not be entitled to the benefit of the deduction. If, on the other hand, it is “business” within the meaning of Section 10 of the Income-tax Act he would be entitled to the benefits of that section and the claim for deductions would be permissible. It was found in that case that it was within the powers of the company to lease the rice mill which they owned as part of their business. As pointed out by the learned Chief Justice at page 531, the lessors were carrying on the business of letting a rice mill and that therefore they were entitled to claim the deduction. The existence of a provision in the memorandum of association of that company authorising the directors to lease out the mill and their business for rent is referred to in the judgment of Krishnan, J., at page 532. It was in pursuance of that authority that the mill was leased to certain lessees for a fixed annual rent for a period of three years. The learned Judges therefore had no difficulty in coming to the conclusion that it was really part of the business of the company and within the objects for which it was formed to lease the rice mill as a working concern to a third party and that therefore the deduction claimed for depreciation under Section 10(2)(vi) of the Income-tax Act could be allowed. The Commr. of Income-tax, Madras v. Bosotto Bros.’, ILR (1940) Mad 178 (SB), is a case where a company which was running a noted at Ootacamund and at Madras rented out the hotel at Ootacamund. There again the question whether the leasing of the hotel was a business of the assessee or the income earned from the property was the income of property became material for the purpose of the deductions which the assessee claimed under S. 10(2)(vi) of the Act. The assessee in that case was undoubtedly carrying on a hotel business at Madras and when he later decided to extend his business to Ootacamund, he constructed a hotel there. Subsequently he found that the business at Ootacamund was not profitable and therefore the company decided to lease the premises along with its furniture and fittings to another firm. During the assessment year, 1937-1938 the assessee company claimed that it was entitled to deduct from its income a sum for depreciation of the buildings and furniture at Ootacamund which was leased by the assessee company. Leach, C.J, at page 180 adverted to the fact that under Clause 3(j) of the memorandum of association of the assessee company, the assessee was authorised, to let for rent the undertaking, viz., the business of carrying on the hotel or any part of it and therefore the letting of the Ootacamund hotel was part of the business of the company. The principle of the decision in ‘Commr. of Income-tax v. Rice and Gin Factory, Guntur’, 50 Mad 529 already referred to was applied. It will be seen that case was analogous to the case before the learned Judges except that in the one case the lease related to a rice mill and in the other to a hotel business. Of the other learned Judges, Mockett, J., agreed with the view of Leach, C.J, and Krishnaswami Aiyangar, J., differed. The principle of these two decisions is that if by its memorandum of as speciation a company is empowered to erect buildings, in which plant and machinery was fixed or furniture and other articles useful for business-were brought in and to let them for rent as part of its business, then the erection of the buildings and the letting them out for rent would constitute business within the meaning of Section 10 of the Income-tax Act. The decision of the question depends upon a proper interpretation of the object clause of the memorandum of association of the company. If it is “business” within the meaning of the Income-tax Act as the definition of business in the Excess Profits Tax Act is wider, it would ‘a fortiori’ follow that it would certainly be a business under the Excess Profits Tax Act. The principle of these decisions therefore is of assistance in deciding the question raised by the assessee in the present case. As has been observed already the memorandum of association of the assessee company excluded any possibility of treating the erection of the new and the letting out of the old and the new buildings as the business of the company.

12. There is another case of this Court in ‘Vailiappa v. Commr. of Income-tax, Madras’, ILR (1945) Mad 693, which was decided under the Excess Profits Tax Act. The assessee in that case-derived income from house properties situate in a place outside British India which property he acquired in the course of his money lending business carried on outside India. He also derived income from certain rubber gardens belonging to him in foreign places. The contention urged on behalf of the assessee was that the income from house property was not profits of the business within the meaning of the Excess Profits Tax Act and that he would be liable only to pay property tax under Section 9 of the Income-tax Act and that the profits could not be taken into consideration for levying excess profits tax. It was held that as the assets were acquired during the course of the money-lending business, as its stock in trade the income from such property was undoubtedly profits of the business of the assessee, viz., the money lending business. The learned Chief Justice distinguished an earlier case decided by him in ‘Annamalai Chettiar v. Commr. of Income-tax, Madras’, ILR (1945) Mad 170 on the ground that in that case they were concerned only with the income from house property abroad, which could be assessed only under Section 9 of the Income-tax Act and not under S. 10 as profits of the business. It is difficult to accept the distinction thus sought to be made by the learned Chief Justice in the latter case. If as part of the money-lending business an asset like house property was acquired, there is no reason to treat income from it as assessable only as income of house property under S. 9 and not as income of the business, such assets form the stock in trade of the money lending business. The distinction, seems to have been recognised in some cases that if from the house property only income is realised it would be taxable for the purpose of income-tax under S. 9 of the Act; but if the asset so acquired is sold and profit was made such profit would be profit of business within the meaning of Section 10 of the Income-tax Act. The distinction made in ‘Valliappa v. Commissioner of Income-tax, Madras’, ILR (1945) Mad 693 at p. 695 between the decision of the learned Judges in ‘Annamalai v. Commissioner of Income-tax, Madras’, ILR (1945) Mad 170 and the case which they were called upon to decide may not be, if I may say so with respect, a logical distinction; but however it is unnecessary to deal with that question in this case and express any final opinion. The decision, however, does not help the assessee in the present case, as the assets in that case were acquired during the course of the money-lending business and the income therefore continued to be part of the business and the profits of such business could be assessed under the Excess Profits Tax Act.

13. There is one decision of the Court of Appeal Reed and Co. Ltd. v. Inland Revenue Commrs., 1948-2-All ER 1079, which considered the question whether income obtained by a company whose business was that of manufacturing paper by letting some of the stock rooms temporarily was an income from “investment” within the meaning of the Excess Profits Tax Act or was a business income. The Commissioners were of opinion having regard to the temporary nature of the letting and the probability of the return of the rooms for the use of business in the future that it was not income from investments which had to be excluded from computation of profits under the Excess Profits Tax Act but was profits of the business which should be included in the computation of the profits. The decision, however, does not throw any light on the question now under consideration as ultimately the Court of Appeal decided that the Commissioners were entitled as a question of fact to come to the conclusion that it was not an investment having regard to the circumstances adverted to by them in their order and that the interference with that order by the Judge against whose decision the appeal was preferred was not justified. No doubt, there are certain observations in the judgment throwing light on the question as to what constitutes an investment but they are not material for the purpose of the present discussion. The decision affords no help in deciding the question that arises for decision in the present case.

14. It is sometimes difficult to draw the line when a letting of property amounts to a trade and when it does not. It has been held by the House of Lords in ‘Comen v. Governors of the Retunda Hospital, Dublin’, (1921) 1 AC 1 at page 13, that when certain rooms were let by Governors of a hospital for entertainments, the fact that there was provision for sitting and beating in those rooms was treated as a crucial circumstance justifying the inference that it was a trade or a business and not a mere letting of the property. Of course, as it often happens in cases under the Income-tax Act, no hard and fast rule can be laid down and it is not possible to draw a line of distinction and formulate a certain test. Each case has therefore to be decided on its own facts.

15. We have adverted to this case only to show that the refinements in the law have been carried to a very large extent and it is difficult always to decide the question when and under what circumstances letting of property may be treated as constituting business. The present case, however, in view of the provisions of the memorandum of association of the company does not present any difficulty and the view taken by the Tribunal that the ??? of the property by the assessee company did not constitute a business and that therefore the profits as well as the capital should not enter into the computation either of profits or of capital under the Excess Profits Tax Act, seems to us to be correct. The question referred to us must be answered against the assessee. As the assessee has failed he must pay the costs of the Commissioner of Income-tax, which we fix at Rs. 250/-.

C.R.K/V.B.B

16. Answer against the assessee.