Harries, C.J:— This is a Reference under s. 66(1) of the Indian Income-tax Act, made by the Appellate Tribunal, Madras Bench, in which the following question is propounded for the opinion of this Court:—

Whether, in the facts and circumstances of the case, the income in question viz., Rs. 2,000 was rightly treated as the income from business for excess profits tax purposes?

The facts giving rise to this litigation may be shortly stated as follows: The assessees are a limited liability company carrying on business as manufacturers of jute products. The assessees had let a portion of their business premises to a firm known as Radha Kant & Co. who were conducting the business of dehydrating potatoes. The assessees claimed that the rent payable by Radha Kant & Co. had not been fixed and that there was a dispute concerning it. Hence their return did not show any rent received in respect of this letting. The income-tax officer did not accept this contention and estimated the income from this letting for ten months of the assessable year Rs. 2,000. This amount was added to the income of the company for the purposes of assessing excess profits tax. The assessee company appealed to the Appellate Assistant Commissioner from the order of the Income-tax Officer, but the appeal was dismissed. There was a further appeal to the Tribunal and there it was contended that this sum of Rs. 2,000 could not be taken into account for the purposes of assessing the income liable to excess profits tax. The appeal was, however, dismissed as, in the view of the Tribunal, this sum of Rs. 2,000 was rightly taken into consideration for the purposes of excess profits tax. The Tribunal pointed out that the assessee company let other portions of their premises to various tenants for use as godowns and had received from these tenants yearly a sum of about Rs. 37,000. This sum the Tribunal point out was shown by the assessee company as part of their income from business and they were, accordingly, assessed in respect of it under s. 10 of the Income-tax Act. The assessee company apparently denied this before the Tribunal, but the Tribunal point out that the actual assessments show that, in respect of this income, they were assessed under s. 10 of the Act. Further, the Tribunal point out that the memorandum of association of the assessee company permits them to purchase, sell, hire and let lands, buildings, warehouses, etc. Those being the circumstances, the Tribunal were satisfied that the assessees were “carrying on operation of business when it was regularly letting out a portion of its business premises to third parties”. The Tribunal, accordingly, held that this sum of Rs. 2,000, payable in respect of the portion of the premises let to Radha Kant & Co., was to be assessed as part of the business income.

The Tribunal relied in the main for its finding on r. 4, sub-r. (4) of Sch. I of the Excess Profits Tax Act, 1940. This sub-rule reads as follows:—

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 s. 9 of the Indian Income-tax Act, 1922, or under any other section of that Act.

In the view of the Tribunal, the business of the assessees consisted partly in letting out property on hire and, therefore, the income derived from such letting was rightly included in the profits of the business.

It will be seen that this rule deals with cases where a business consists wholly or partly in letting out property and, before it can apply, the letting of property must be wholly the business of the company or at least part of the business.

In the Income-tax Act, 1922, “business” is defined in s. 2(4). The term “business”, it is said, includes any trade, commerce or manufacture or any adventure or concern in the nature of traded commerce or manufacture. It has been held by this Court in the case of In re Commercial Properties, Ltd. that owning property and carrying on only the business of letting such houses is not a business within the meaning of that term as used in the Income-tax Act and that the income from the letting of such property cannot be regarded as the profits and gains of a business and, therefore taxable under s. 10 of the Act. The income must be regarded as the income from property and, therefore, taxable under s. 9 of the Act.

In that case, the Commercial Properties Limited, were a registered company, the sole object of which was to acquire land, build houses and let premises to tenants in Calcutta or elsewhere in India. At the time of assessment, the sole assets of the assessees consisted of three properties and the sole business of the assessees was the management and collection of rents from the said properties. It was held that the income from these properties could not be treated as the profits and gains of business, but rather as the income from property taxable under s. 9 of the Act. At pp. 1061-2, Rankin, C.J, who delivered the judgment of the Special Bench of three Judges, observed:—

In the present case we have a company which owns three estates. It does not appear that any part of that property is outside the definition given in s. 9. It is found to let the houses from time to time, to see to the payment of rents and (doubtless) the doing of repairs. If that is carrying on a business, then this company carried on a business in the sense in which every landlord or owner of this type of property must necessarily carry on business.

At p. 1062 the learned Chief Justice observed:—

In my judgment the words of s. 6 and s. 9 and s. 10 must be read so as to give some effect to the contrast that is there made between income, profits and gains from “Property” and from “Business” and I entirely refuse my assent to the proposition that because it happens that the owner of a property is a company which had been incorporated for the purpose of owning such property, therefore, the income derived from “Property” must be regarded as income derive from “Business”. In my judgment income derived from “property” is a more specific category applicable to the present case.

At p. 1066 the learned Chief Justice, after discussing certain English cases, sums up the matter in these, words:—

In my judgment these cases are not authorities to the effect that as between the word “Property” and the word “Business” in s. 6 of the Indian Income-tax Act, 1922, a case of this character is to be put under the word “Business”. It comes more directly and specifically under the word “Property”. In my judgment, the mere fact that the house-owner is a company does not change the incidence of the tax in the way contended for. The income of the assessee is income derived from its ownership of buildings and their curtilages. To obtain such income, a certain amount of management is always necessary, but the Act does not regard such income as profits of management. To own houses one must buy or build them, but the Act does not regard such income as profits of investment.

The Madras High Court took a different view in the Commissioner of Income-tax, Madras v. Gin and Rice Factory, Guntur; and Commissioner Of Income-Tax, Madras v. Messrs. Bosotto Brothers, Ltd., Madras, limited,. However, it is clear that this Bench is hound by the view of this Court and, therefore, I am hound to hold that, for the purposes of the Indian Income-tax Act, the mere management of property does not amount to a business and income derived from such property cannot be regarded as the profits and gains of a business.

If a company, whose sole activities consist in building houses, letting out the same and collecting the rents thereof does not carry on a business in the sense that the rents and profits it receives are profits and gains of business it appears to me to follow that if a company engaged in some manufacturing business lets out part of its property to tenants, the rents and profits received from such letting cannot be regarded as the profits of its business and, therefore, the letting of that property is not either part of its business or a separate business, as that term is regarded in the Indian Income-tax Act. That being so, I should be bound to hold that this sum of Rs. 2,000 received in respect of the letting to Radha Kant & Co. could not be assessed do income-tax as part of the profits and gains of the business, but would have to be assessed as income derived from property. The Tribunal point out that in the past certain other rents for godowns have been included as part of the profits and gains of the business and that is used as an argument for including this sum of Rs. 2,000 as part of the profits and gains of the business. In my view, the rents for these godowns were wrongly included as parts of the profits of the business and the assessees were wrongly assessed under s. 10 of the Act in respect of them. The fact that similar rents have been wrongly assessed in the past is no reason whatsoever why this sum of Rs. 2,000 should now be regarded for the purposes of income-tax at least as part of the profits and gains of the business.

The definition of “business” in the Excess Profits Tax Act, 1940, is the definition contained in the Indian Income-tax Act, 1922, but somewhat enlarged.

“Business” is defined in s. 2(5) of the Excess Profits Tax Act, 1940, as including—

Any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture or any profession or vocation, but does not include a profession carried on by an individual or by individuals in partnership if the profits of the profession depend wholly or mainly on his or their personal qualifications unless such profession consists wholly or mainly in the making of contracts on behalf of other persons or the giving to other persons of advice of a commercial nature in connection with the making of contracts:

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.

It will be seen from this proviso that it is conceded that the holding of investments or other property is not a business for the purposes of the definition contained in s. 2(5) of the Excess Profits Tax Act. But it is provided that if 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 property, then the holding of such investments or property, though not business, shall be deemed to be a business for the purposes of the Act.

This proviso, to my mind, admits the correctness of the, decision in In re Commercial Properties, Ltd. (supra). But it expressly makes the activities of a company wholly or mainly-concerned with the holding of property a business for the purposes of the Act.

The assessee company in this case was, as its name suggests, a company engaged in the manufacture, and sale of jute products. It apparently owned a jute mill and the letting of godowns or parts of their business premises appears to have been incidental, to the main business of the assessee. There is no finding by the Tribunal that the letting of the property was the whole business or the main business of the assessee company, but the Tribunal was satisfied that it was part of the business and, therefore, the income from the letting of such property was rightly included as part of the business income for the purposes of the Excess Profits Tax Act.

It is true that, in r. 4, sub-r. (4) of Sell. I of the Excess Profits Tax Act, it is stated that, in the case of a business which consists wholly or partly in letting out a property on hire, the income from such property shall be included in the profits of the business. It is, therefore, said that, as the business of the assessees consist partly in letting out property, the income from such letting was rightly included as income from business.

The rules in Sch. I cannot be construed as being at variance with the substantive provisions of the Excess Profits Tax Act and it appears to me that, by the plain terms of s. 2(5) of the Excess Profits Tax Act, the holding of property is not a business, unless it is the whole function or the main function of a company or a, society incorporated under any Act. It follows, therefore, that, if the holding of property is not the whole function or at least the main function of a company, then the holding of such property does not in itself constitute a business and it cannot be said that the business of the company consists in part of holding property. The business of a company can only consist in part of holding property if the holding of such property amounts to a business and, by the terms of the proviso to s. 2(5) of the Excess Profits Tax Act, holding property can only amount to a business where it is the sole or main function of a company.

Letting out property is the ordinary method of obtaining income from the property and management of property by letting it out does not result in an income from business, unless, as I have said, the function of managing and letting out the property is the sole or main function of the company. It follows, therefore, that, where a manufacturing company derives a certain income from letting out part of its premises to tenants, it cannot be said to be conducting a business with regard to such letting. Further, it appears to me clear that such letting cannot be part of its manufacturing business and, therefore, the Income from such property and the letting thereof cannot be regarded as part of the business income, unless the case falls within the proviso to s. 2(5) of the Excess Profits Tax Act.

Had sub-r. (4) of r. 4 of Sch. I of the Excess Profits Tax Act read “In the case of a business which consists wholly or mainly in letting out a property on hire the income from property shall be included in the profits of the business whether or not it has been charged to income-tax under s. 9 of the Indian Income-tax Act, 1922, or under any other section”, no difficulty could have arisen. But it is strongly urged that, as the word “partly” is used in the rule instead of the word “mainly” in the proviso to the definition of “business” in s. 2(5) of the Excess Profits Tax Act, the rule has a wider application. But, as I have said, the rule and the definition of “business” must be so construed as to avoid conflict. If, by the definition, a company holding property does not carry on a business unless the holding of such property is its whole or main function, then the rule cannot extend the definition so as to make a company, which holds property as a minor function, carry on business with regard to such property. In my view, the income derived from the holding and letting of property by the assessee company was income derived from property and it could not be regarded as the profits and gains of a business, as there is no finding that the holding and letting of such property were the sole or the main function of the company.

For these reasons the question stated by the Tribunal in the case submitted should be answered in the negative. The assessee company will be entitled to its costs and the return of the deposit of Rs. 100. Certified for two counsel.

Chatterjee, J.:— I agree.

Reference rejected and answered in favour of the assessee.

R.K.B