Ratnam, J.:— In this reference under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), at the instance of the Revenue, the following questions of law have been referred for the opinion of this court in respect of the assessment year 1971-72:
“(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the income received by the assessee from Vahini Studios and Vijaya Studios should be assessed in the hands of the assessee as business income?
(2) Whether the finding of the Appellate Tribunal is a reasonable view to take on the facts and in the circumstances of the case?
(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the fees of Rs. 3,188 paid by the assessee to the approved valuer for valuing the studios of the assessee for the purpose of wealth-tax assessment was an allowable expenditure under section 37 of the Income-tax Act, 1961, and the same should, there-fore, be allowed for the assessment year 1971-72?”
2. The assessee is an individual and he was, at the material time, the owner of the two film studios in Madras by name Vijaya Studios and Vahini Studios and he leased them out. The rental income derived by the assessee was assessable as part of the assessee's total income. The assessee maintained before the Income-tax Officer and the Appellate Assistant Commissioner that the rental income from the studios in question should be assessed under the head “Business income”. This, however, was rejected and the Income-tax Officer as well as the Appellate Assistant Commissioner assessed the rental income from Vijaya Studios under the head “House property” and that from Vahini Studios under the head “Other sources”.
3. On further appeal before the Tribunal by the assessee contending that the rental income from the studios in question for purposes of tax treatment should be regarded as “business income”, the Tribunal, relying upon its earlier order in I.T.A Nos. 1789 and 1794 dated November 30, 1973, held that the income should be assessed under the head “Business”. In that view, even in respect of the assessment year 1971-72, the Tribunal concluded that the rental income derived by the assessee from the studios in question should be assessed under the head “Business” That is how the first question set out earlier has arisen.
4. We may point out that in respect of the same assessee in respect of the assessment years 1963-64 to 1968-69 and 1969-70, the identical question came to be considered by a Division Bench of this court in CIT v. B. Nagi Reddy, [1984] 147 ITR 337 (to which one of us was a party). Therein, it was pointed out that whether a particular letting is business has to be decided in the circumstances of each case and in the setting and background of the facts, and that there is no such thing as a naturally born commercial asset because an asset becomes a commercial asset in view of the use to which it was put in a business and not because of any inherent qualities. Considering the many-sided career of the assessee in film business, as a producer, as a distributor, as an exhibitor, as a studio-owner and the like, it was held that on an overall consideration of these facts, the tax treatment to be accorded to the rental income had to be determined and the determination of the Tribunal based on the consideration of all the facts inclusive of the utilisation of the two studios by the assessee for making films of his own and letting them out to others as well realising rental income therefrom, constituted “business activities” in relation to the studios in question and, therefore, the rental income was rightly brought to tax under the head “Business income” With reference to the assessment year in question also, the same considerations would apply and the facts also are not different and, under those circumstances, in view of the decision referred to earlier in CIT v. B. Nagi Reddy, [1984] 147 ITR 337 (Mad), we hold that the Tribunal was right in its conclusion that the income received by the assessee from the Vijaya and Vahini Studios should be assessed in the hands of the assessee as “business income”. We, therefore, answer the first question referred to us in the affirmative and against the Revenue.
5. We now proceed to consider the second question referred to us. On the available facts and circumstances, the view taken by the Tribunal cannot be stated to be an unreasonable one. We had earlier pointed out that even in respect of the assessment year in question, the factual background relating to the receipt of rental income by the assessee had remained the same and, under those circumstances, the view taken by the Tribunal should be regarded as a reasonable one on the facts and in the circumstances of the case. We, therefore, answer the second question referred to us in the affirmative and against the Revenue.
6. We now proceed to a consideration of the last question referred to us. Learned counsel for the Revenue submitted that since payment of wealth-tax is not an allowable deduction and such payment has nothing whatever to do with the carrying on of businesses by the assessee, the expenditure incurred by the assessee in the matter of payment of fees to the approved valuer for valuing the studios cannot be regarded as an item of allowable expenditure under section 37 of the Act. On the other hand, learned counsel for the assessee submitted that the expenditure was incurred by the assessee for the preservation and protection of the business as well as the assets of the assessee from any proceedings which might have resulted in the reduction of his income and profits and for reducing his liability to wealth-tax, resulting in the availability of more funds with the assessee for the purpose of carrying on business and that would be an expenditure incurred with the object of saving tax and safeguarding business, justified by commercial expediency and, therefore, allowable under section 37 of the Act.
7. We have carefully considered the aforesaid rival submissions. There is no dispute that the assessee is not only the owner of the studios in question, but he is also one who carries on business in films. It was on this basis that in CIT v. B. Nagi Reddy, [1984] 147 ITR 337, this court concluded that the rental income from the studios was rightly assessed under the head “Business income”. It is with reference to these studios that the assessee had incurred the expenditure in order to secure a valuation report from an approved valuer, though for purposes of wealth-tax. However, the object of the assessee in doing so is only to see to it that the assets, viz., the studios in question are properly valued for purposes of wealth-tax and, in that sense, the assessee expended the amount in question only to contain the wealth-tax payable and the preservation and protection of the assets and the business of the assessee and for preventing a reduction of the income and profits therefrom, as, in the event of higher wealth-tax becoming payable, on an arbitrary valuation, it would have resulted in the reduction of the income and profits of the assessee. It is true that, ordinarily, a business is carried on for the purpose of earning profits and not for payment of tax. However, it must be borne in mind that the earning of profits and the payment of taxes are not to be regarded as isolated and independent activities of a business, but are so interlinked, that they should be considered as continuous activities taking place from time to time during the whole period of the continuance of the business. This principle has been laid down in CIT v. Birla Cotton Spinning and Weaving Mills Ltd., [1971] 82 ITR 166 (SC).
8. There, the question arose whether expenditure incurred by the assessee in connection with the conduct of proceedings before the courts in respect of proceedings initiated against the assessee under the Taxation on Income (Investigation Commission) Act, 1947. could be allowed as deduction in the computation of the profits of the business either under section 10(1) or section 10(2)(xv) of the Indian Income-tax Act, 1922. It was pointed out by the Supreme. Court (at p. 171):
“The essential test which has to be applied is whether the expenses were incurred for the preservation and protection of the assessee's business from any such process or proceedings which might have resulted in the reduction of its income and profits and whether the same were actually and honestly incurred. It is not possible to understand how the expenditure on the proceedings in respect of the Investigation Commission by the assessee will not fall within the above rule. Even otherwise, the expenditure was incidental to the business and was necessitated or justified by commercial expediency. It must be remembered that the earning of profits and the payment of taxes are not isolated and independent activities of a business. These activities are continuous and take place from year to year during the whole period for which the business continues. If the assessee takes any steps for reducing its liability to tax which result in more funds being left for the purpose of carrying on the business, there is always a possibility of higher profits. To give an illustration, if an assessee can, by appropriate proceedings, succeed in getting its tax liability for gains and profits reduced by a sum Of Rs. 1,00,000, that amount will essentially become available for the purpose of business with a reasonable expectation of more profits. As was observed by Viscount Simon in Smith's Potato Estates' case, [1949] 17 ITR (Suppl) 1; [1948] 30 TC 267, if the trader considers that the Revenue seeks to take too large a share and to leave him with too little the expenditure which the trader incurred in endeavouring to correct this mistake is a disbursement laid out for the purposes of his trade. If he succeeds, he will have more money with which to earn profits next year.”
9. We are of the view that the aforesaid considerations would be equally applicable to the expenditure incurred by the assessee in this case, which was for the purpose of containing, and if possible to reduce, the wealth-tax liability, resulting in more funds being made available to the assessee for his business purposes. It may be, as contended by learned counsel for the Revenue, that the wealth-tax paid by the assessee may not be an allowable item of expenditure, in view of section 40(a)(iia) of the Act. Even so, the expenditure incurred by the assessee in this case was not towards the payment of any wealth-tax, as such, but, as pointed out earlier, it was intended only to effectively reduce the ultimate wealth-tax liability leading to the availability of more funds in the hands of the assessee for the purpose of being utilised in his business activities. We have, therefore, no hesitation in holding that this expenditure had been laid out or expended by the assessee wholly and exclusively for the purpose of business and, therefore, is allowable in computing the income under section 37 of the Act. Though counsel on both sides referred to several other decisions, we are of the view that it is not necessary to make a reference to all of them, since the matter is squarely governed by the decision of the Supreme Court referred to earlier. We, therefore, answer the third question referred to us also in the affirmative and against the Revenue. The assessee will be entitled to the costs of this reference. Counsel's fee Rs. 500.
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