The Judgment of the Court was delivered by

Dipak Kumar Sen, J.:— Bengal Jute Mills Co. Ltd., the assessee, was assessed to income-tax for the assessment years 1970-71 and 1971-72, the corresponding accounting years ending on the 30th June of the calendar years 1969 and 1970.

2. In both the said assessment years, the assessee, following the mercantile system of accounting, had included in its income and had shown in its returns a sum of Rs. 6,27,433 receivable by way of interest from Chandpur & Co., one of its debtors. This amount was brought to tax as part of the total income of the assessee.

3. For the assessment year 1970-71, it was held by the Income-tax Officer that the assessee had failed to file the return within time and an order was passed levying penal interest under sections 139, 215, 216 and 217 of the Income-tax Act, 1961 (“the Act”), as might be attracted. In the assessment year 1970-71, the assessee had sold old machinery for a consideration of Rs. 1,34,246. The Income-tax Officer recorded that the cost or the written down value of the said old machinery could not be ascertained by the assessee and, therefore, adjustment of profits on sale of the same could not be made. The Income-tax Officer added the entire amount of Rs. 1,34,246 to the total income of the assessee.

4. In the assessment year 1970-71, the assessee claimed a deduction of Rs. 42,755 stated to have been spent on account of repairs of its buildings including godown. The Income-tax Officer held that the assessee had failed to furnish detailed evidence and that the income from the said godown should be treated as income from property to be considered separately. He, therefore, disallowed the said deduction from the business income of the assessee and added back the same.

5. In the assessment year 1971-72, the assessee claimed before the Income-tax Officer that the godowns were its commercial assets and that the income from letting out of such commercial assets should be treated as its business income and not as income from property. The assessee claimed that the business of the assessee in jute had been suspended temporarily but the assessee was exploiting its commercial assets in the said business to earn a return and that the yield of such commercial assets should be treated as business income of the assessee. The Income-tax Officer rejected this claim. He found that from the assessment year 1964-65 onwards, the assessee had been letting out its godowns on rental basis and the income derived therefrom had been shown as rental income. He held that in view of the same it could not be said that the jute business of the assessee had been suspended temporarily.

6. From the assessments made in both the said assessment years, the assessee preferred appeals before the Appellate Assistant Commissioner. In his order passed in respect of the assessment year 1970-71, the Appellate Assistant Commissioner held that section 246 did not provide for appeal against the charging of interest under section 139. The appeal of the assessee against the charging of interest was accordingly rejected.

7. In respect of Rs. 1,34,245 being the sale proceeds of the old machinery of the assessee, the decision of the Income-tax Officer to treat the entire amount as income of the assessee was upheld by the Appellate Assistant Commissioner as the assesses was unable to furnish the particulars of the cost or written down value of the same.

8. The Appellate Assistant Commissioner also found that deduction of municipal tax of Rs. 1,18,147 had been allowed against the rental receipt from the godown as income from property. On this ground, he sustained the disallowance of Rs. 42,755 spent for repairs to the godown as made by the Income-tax Officer.

9. In the appeal preferred from the assessment in the assessment year 1971-72, the Appellate Assistant Commissioner found that the return for the said assessment year which should have been filed by December 31, 1970, was in fact filed on October 13, 1972. He held that the Income-tax Officer had rightly charged interest from October!, 1971, under section 139(1) as no specific extension of time had been granted by the Income-tax Officer.

10. On the claim of the assessee that the rent received from letting out of the assessee's godowns should be treated as business income as the godowns were commercial assets of the company, it was found by the Appellate Assistant Commissioner that the said godowns had been consistently let out on and from the assessment year 1964-65 and the income received thereby had been shown as income from property, though, in the earlier years, the assessee had been carrying on its business and had sold jute in large quantities. Only during the relevant accounting year, no sale of jute has been shown on the ground of cessation of work due to labour and financial troubles. The Commissioner found that there was no relation between the cessation of the business of the assessee and the letting out of the godowns and that such letting out was not a temporary phenomenon. He held that the alleged commercial assets had been let out not for business but for other purposes. There had been subletting of the said godowns by some of the original tenants. It was found that the godowns let out had not been used in business at all and had lost their commercial character. The Appellate Assistant Commissioner accordingly upheld the order of the Income-tax Officer treating the amount received from letting out the godowns under the head “Income from house property”.

11. Being aggrieved, the assessee preferred further appeals before the Tribunal in respect of both the assessment years. Before the Tribunal, the assessee for the first time contended that the inclusion of interest aggregating to Rs. 6,27,433 in each of the said assessment years was incorrect inasmuch as a suit had been filed by the assessee against Chandpur & Co. and, therefore, it could not be held that any interest had accrued from the said debtor in favour of the assessee in the relevant accounting years, even though the assessee had been following the mercantile system of accounting. It was contended that under section 34 of the Code of Civil Procedure, 1908, award of any interest during the pendency of the litigation was in the sole discretion of the court and until such discretion was exercised, it could not be said that interest would accrue to the assessee. On September 30, 1961, the assessee had filed a suit in this court against Chandpur & Co., claiming Rs. 1,29,20,200 with interest as noted in the balance-sheet of the assessee and under a misconception, amounts by way of interest had been included in the accounts of the assessee in the relevant assessment years.

12. It was contended on behalf of the Revenue on the authority of the decision of the Supreme Court in Addl. CTT v. Gurjargravures P. Ltd., [1978] 111 ITR 1, that it was not open to the assessee to raise this question for the first time before the Tribunal.

13. The Tribunal held that there was material on record in support of the contention of the assessee that the amounts of interest did not accrue or arise in view of section 34 of the Code of Civil Procedure. On that basis, the Tribunal distinguished the decision of the Supreme Court in Gurjargravures P. Ltd.'s case, [1978] 111 ITR 1 and accepted the contention of the assessee. The Tribunal directed the Income-tax Officer to exclude the amounts in question representing interest from the total income of the assessee in each of the two assessment years.

14. On the question of inclusion of Rs. 1,34,246 received by the assessee on sale of old machinery in its total income in the assessment year 1970-71, the assessee referred to and relied on a circular of the Central Board of Revenue, namely, C. No. 27(19)-11/39, dated August 21, 1940. It was directed in the circular that where it was not practicable to; compute the written down value of discarded machinery or plant, no allowance should be given under section 10(2)(vii) of the Indian Income-tax Act, 1922, nor should any gain contemplated under the said circular be calculated or added but the sale proceeds of the discarded machinery or plant should be deducted from the aggregate written down value of the entire machinery and plant. It was contended on behalf of the assessee that this circular of the Board was binding on the Revenue. It was contended further on behalf of the assessee that in any event, the said circular laid down a manner of interpretation or guideline for the Revenue which was practical and should be followed.

15. It was contended on behalf of the Revenue that the circular was ancient and should not be followed. It was also contended that this circular might have been withdrawn.

16. It was held by the Tribunal that there was no evidence that the said circular had been withdrawn at the material time. The Tribunal accepted the circular and held that where no written down value could be ascertained, the sale proceeds of old machinery should be regarded as the written down value for which no profit could be held to accrue to the assessee. The Tribunal directed the Income-tax Officer to delete the said amount of Rs. 1,34,246 from the total income of the assessee.

17. On the disallowance of Rs. 42,755 spent on account of repairs to the godowns in the assessment year 1970-71, it was contended on behalf of the assessee before the Tribunal that the godowns of the assessee were commercial assets and it was necessary for the assessee to keep the said godowns in constant repairs for carrying on its commercial activities. It is contended on behalf of the Revenue, on the other hand, that where a statutory deduction, namely, municipal tax paid by the assessee, had been allowed in respect of its income from property, viz., the said godowns, no further deduction was permissible.

18. The Tribunal found that the said amounts had actually been spent for repairs as certified by the auditors; that the said deduction had not been allowed for lack of particulars and that the assessee was not claiming the deduction more than once. The Tribunal noted that the claim of the assessee had been disallowed on the ground that the same was excessive. The Tribunal also noted that there was no evidence that the repairs were effected on properties from which income has been shown in the return. On the basis of the above, the Tribunal allowed the claim of the assessee.

19. The contention of the assessee raised in the assessment year 1971-72, that the godowns of the assessee were commercial assets and that the income derived therefrom should be treated and assessed as business income were pressed before the Tribunal. It was contended that the godowns had been used in the jute business of the assessee as commercial assets. The position would remain the same even if there was a decline in the business in jute during the relevant assessment years. It was contended further that the fund of the assessee relating to its various businesses were interlocked and interlaced and the management was common. Therefore, the income from letting out of godowns should be regarded as income from business. It was also contended that in all earlier years, depreciation had been allowed in respect of the said godowns on the basis that they were commercial assets.

20. It was contended on behalf of the Revenue that in the relevant assessment year, the income of the assessee from its business in jute was small and was only Rs. 50,000 approximately. It was contended that there was sufficient evidence on record to show that the business of the assessee in jute had declined and had not revived.

21. The Tribunal noted that under section 205 of the Companies Act, 1956, it was obligatory on the assessee to provide for depreciation before it could declare any dividend. The Tribunal found that the business of the assessee in jute had been continued in the subsequent year. The Tribunal also noted that depreciation had been allowed in respect of the godowns all along.

22. The Tribunal held that even if the income from the godowns would be chargeable under the head “Income from house property”, the godowns had been treated in the balance-sheet as commercial assets of the assessee in the past on the basis of which depreciation had been allowed. The Tribunal held that loss from its business could be set off against income from godowns which were held as commercial assets. The Tribunal held that income from godowns was required to be assessed under the head “Income from house property” but the assessee was entitled to set off its business loss of earlier years suffered in respect of jute business against the rental income from godowns.

23. On the question of interest, it was contended by the assessee that no interest could be charged under section 139(1) where the Income-tax Officer had not extended the time for filing of the return. The said contention of the assessee was accepted by the Tribunal in view of the decision of this court contained in a judgment dated August 8, 1975, in Civil Revision Case No. 1203 of 1972.

24. On an application of the Revenue under section 256(1) of the Act, the following questions have been referred as questions of law arising out of its order for the opinion of this court:

Common questions for the assessment year 1971-72:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in entertaining the ground regarding inclusion of interest of Rs. 6,27,433 in the total income?

2. Without prejudice to the answer to question No. 1 above, whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that interest of Rs. 6,27,433 credited by the assessee in its accounts maintained on the mercantile system, did not accrue to the assessee and, therefore, was not assessable for the assessment years 1970-71 and 1971-72?

3. Whether the Tribunal was justified in holding that an appeal lies to the Appellate Assistant Commissioner against levy of interest under section 139 of the Income-tax Act, 1961, if the assessee files appeal against the same assessment order?”

Questions for the assessment year 1970-71:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the disallowances on account of repairs to property?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,34,246 was not includible in the total income of the assessee under section 41(2) of the Income-tax Act, 1961?”

Questions to be referred for the assessment year 1971-72:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal had relied on irrelevant material and/or ignored relevant material in coming to the conclusion that the godowns were commercial assets in the hands of the assessee-company?

2. Whether, on the facts and in the circumstances of the case, the Tribunal's finding that the godowns were commercial assets in the hands of the assessee-company was perverse?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that for the assessment year 1971-72, the assessee was entitled to set off of business losses carried forward from earlier years against the rental income from godowns?”

25. On the common question No. 1 for the assessment years 1970-71 and 1971-72, the learned advocate for the assessee drew our attention to the decision of the Supreme Court in Gurjargravures (P.) Ltd.'s case, [1978] 111 ITR 1, and a decision of this court in Madhu Jayanti P. Ltd. v. CIT, [1985] 154 ITR 277.

26. In Gurjargravures (P.) Ltd.'s case, [1978] 111 ITR 1, the Supreme Court held that the assessee was not entitled to claim relief under section 84 of the Act by way of exemption where such claim had not been made before the Income-tax Officer at the time of the assessment nor was there any material on record supporting such a claim except that in a subsequent year such relief had been granted to the assessee. The Supreme Court, however, made it clear that they were not considering a case where the assessee failed to make a claim though there was evidence on record to support it.

27. In Madhu Jayanti P. Ltd.'s case, [1985] 154 ITR 277, this court considered the decision of the Supreme Court in Gurjargravures (P.) Ltd's case, [1978] 111 ITR 1, as also decisions of the other High Courts on the question. In the facts of this case, it was found that where the assessee had made a claim before the Income-tax Officer in respect of particular items of expenditure some of which had been allowed by the Appellate Assistant Commissioner and the assessee had obtained relief under section 35B of the Act in respect of other items of expenditure, it was open to the assessee to enhance or expand its original claim before the Tribunal by including other items where the claims were supported by evidence on record.

28. In the instant case, it appears that the fact that the suit had been filed by the assessee and that the said suit had remained pending before this court was recorded in the balance-sheet of the assessee which formed part of the records of the case. The assessee apparently failed to make a claim for non-inclusion of the interest earlier.

29. The Tribunal on such material on record allowed the assessee to raise the claim before it. Inasmuch as evidence in support of the claim could be found on record, this, in our view, brings the instant case within the exception noted by the Supreme Court in Gurjargravures (P.) Ltd.'s case, [1978] 111 ITR 1. For the above reasons, we answer the said question in the affirmative and in favour of the assessee.

30. On the common question No. 2 for the assessment years 1970-71 and 1971-72, the learned advocate for the assessee drew-our attention to a decision of this court in Commissioner Of Income-Tax, West Bengal-V v. Raigharh Jute Mills Ltd., [1981] 132 ITR 702, where a Division Bench of this court, following the two decisions of the Supreme Court in Soli Pestonji Majoo v. Ganga Dhar Khemka, (1969) 1 SCC 220 : AIR 1969 SC 600 and State of Madhya Pradesh v. Nathab Hai Desaibhai Patel, (1972) 4 SCC 396 : AIR 1972 SC 1545 : [1972] 29 STC 104, held that where a suit had been filed, the right to obtain interest on the principal claimed for the period subsequent to the institution of the suit would depend not on the bargain between the parties but on the discretion of the court under section 34 of the Code of Civil Procedure. The Tribunal noted that in the instantcase no interest was actually received by the assessee after the filing of the suit. The fact that an entry was made by the assessee in its books crediting the interest on a misconception and the mere posting of the entry would not conclusively determine the issue. An assessee should be taxed only on the income which lawfully accrues or arises to him.

31. The view taken by the Tribunal appears to us to be correct and calls for no interference by us. The decision of the Tribunal was upheld by this court, inter alia, on a similar issue in Raigharh Jute Mills Ltd.'s case, [1981] 132 ITR 702. We answer the common question No. 2 in the affirmative and in favour of the assessee.

32. On the common question No. 3 for the assessment years 1970-71 and 1971-72, the learned advocate for the assessee cited two decisions of this court. The first was Commissioner Of Income-Tax, West Bengal-Iii v. Lalit Prasad Rohini Kumar, [1979] 117 ITR 603. In this case, it was held by a Division Bench of this court that where a person denied his liability to be chargeable to interest at all under the Act, he would in fact be denying his liability to be assessed under the Act and his contention though only in respect of interest would be covered by clause (c) of section 246 of the Act. It was held that in this context the question of levy of interest could be agitated in an appeal. It was, however, held that where the liability to pay interest as such was not being denied by the assessee but only the imposition of interest was being challenged either being excessive or not being made in the regular course, an appeal would not lie in such cases.

33. The same question came up again before this court subsequently in CIT v. Karam Chand Thapar & Bros. (P.) Ltd., [1979] 119 ITR 751. In that case, it was reiterated after a review of a number of decisions and it was held, inter alia, as follows (page 768):

“Even without denying totally his liability to be assessed, an assessee may deny totally his liability to pay interest. For example, the assessee may contend that he was not at all liable to pay advance tax or where interest has been levied for delay in filing of the return, the assessee may contend that, in fact, there was no such delay. In such cases also, it is open to the assessee to challenge the imposition of interest in appeal.”

34. Following the said decisions, we answer question No. 3 also in the affirmative and in favour of the assessee.

35. On question No. 1 for the assessment year 1970-71, the learned advocates for the parties reiterated their respective contentions before the authorities below. It appears to us that the Tribunal had allowed the amount claimed on repairs effected by the assessee to its property on the following grounds:

(a) It was an admitted fact that expenses had been incurred, the only objection of the Revenue being that details were not available.

(b) The assessee was carrying on business and for the said purpose had to incur expenditure for repairs.

(c) There was no evidence that the assessee was making a double claim in respect of repairs and that deduction for repairs had already been granted in respect of the property.

(d) It was not the case of the Revenue that the claim for repairs was excessive.

(e) The auditors had certified the amounts spent on repairs.

36. None of the above findings of the Tribunal has been challenged by the Revenue as perverse or based on no evidence. The Tribunal has found that the repairs were effected in the assessee's units of business and accepted the quantum spent on repairs as the same had been certified by the auditor. The said findings have become final and binding.

37. Question No. 1 for the assessment year 1970-71 is, therefore, answered in the affirmative and in favour of the assessee.

38. On question No. 2 for the assessment year 1970-71, the learned advocate for the Revenue submitted that the Tribunal erred in following the said circular of the Central Board of Revenue dated August 21, 1940. The said circular, being a very old circular, should have been held to be of no effect and obsolete. The Tribunal, however, held that there was no evidence adduced by the Revenue to show that the circular had been withdrawn and, therefore, the same was held to be valid and effective. The Tribunal also held that, even otherwise, the computation suggested by the circular was practical and there was no reason why it should not be followed.

39. On a consideration of the respective contentions of the parties, it appears to us that where the original cost or the subsequent written down value by adjustment of depreciation cannot be determined, it would not be proper to assume that the written down value of such machinery should be treated as nil and that the entire amount realised from the sale of such machinery should be treated as profits and included in the income of the assessee. We also cannot ignore altogether the circular dated August 21, 1940, which was binding on, and had been followed by, the Tribunal. It is also equally correct that there was no evidence to hold that the price realised from the sale of the said machinery did not exceed the written down value of the same and no part of such price could be included in the total income of the assessee. On the evidence on record, we are unable to answer question No. 2 and we remand the matter to the Tribunal for ascertainment of the written down value of the said machinery, if necessary, by taking further evidence.

40. In respect of the three questions referred for the assessment year 1971-72, the learned advocate for the assessee cited three decisions of this court to show under what circumstances a particular asset of an assessee should be considered to be a commercial asset in its hands. The said decisions are as follows:

Commissioner Of Income-Tax, Delhi-I v. J.M.A Industries Ltd., [1976] 103 ITR 245 (Cal). In this case, the assessee was incorporated with the object of manufacturing pipes. The assessee constructed factory sheds and buildings but could not start manufacture for want of certain machinery to be imported. The assessee let out the factory sheds and part of the non-factory buildings and godowns and claimed that the rental income was assessable as income from its business. On these facts, it was held by a Division Bench of this court that the rental income received from its factory sheds could not be held to be income from business as the assessee had not started its business. Such income should be assessable as income from other sources.

41. So far as rental income from non-factory buildings and godowns were concerned, it was found that after actual user of portions of such nonfactory buildings and godowns for its business, the assessee had let out only the surplus. It was held that such non-factory buildings and godowns were commercial assets of the company which the company was utilising mainly for its own purpose and letting out only the surplus. The income derived from letting out such surplus portion of the commercial assets was held to be the business income of the assessee.

42. CIT v. Prem Chand Jute Mills Ltd., [1978] 114 ITR 769 (Cal). In this case, a Division Bench of this court reiterated some of the principles laid down in an earlier decision of this court in Everest Hotels Ltd. v. Commissioner Of Income-Tax, West Bengal, [1978] 114 ITR 779 . The said propositions were, inter alia, that (a) income arising from exploitation of commercial assets as established by evidence would be business income within the meaning of section 10 of the 1922 Act, (b) it was open to the assessee to exploit commercial assets himself or through some other person under a lease, (c) the income derived from such a lease would also be business income and taxable as such as it was shown that the intention of the lessor was that during the period of the lease the assets let out must remain and be treated as commercial assets and exploited as such, (d) such intention of the lessor was to be ascertained from the cumulative effect of the entire terms of the lease and other materials.

43. CIT v. Katihar Jute Mills (P.) Ltd., [1979] 116 ITR 781 (Cal). In this case, the principles laid down in Everest Hotels Ltd's case, [1978] 114 ITR 779 (Cal) were applied to the facts and it was held that where the assessee had temporarily stopped its business of running a jute mill because of financial difficulties but had exploited its commercial assets by letting out the mills on a lease in the meantime and where the different clauses of the deed of lease manifested an intention on the part of the assessee that the assets would be maintained as commercial assets till the expiry of the lease and also where the assessee had retained some of its commercial assets, the same would go to show that the assessee wanted to retain the assets as commercial assets and also to exploit the same as commercial assets by letting it out. The rent received on such a lease would be the assessee's business income.

44. From the facts as found in the instant case, it appears that the assessee had not ceased to carry on its business in jute entirely but had been suffering losses for a long time which was being carried over from year to year. It is also on record that the godowns had been let out by the assessee since the assessment year 1964-65. At no stage, the terms and conditions of the letting out of the godowns were examined by any of the authorities below. The Tribunal has held that the godowns are commercial assets of the assessee for, inter alia, the following reasons:

(1) Under section 205 of the Companies Act, it is obligatory on the part of the assessee to provide depreciation before the assessee can arrange for declaration and distribution of dividend.

(2) Though the assessee did not carry on any business in jute in the assessment year 1971-72, the assessee resumed its business in the subsequent year.

(3) The assessee had claimed and had been allowed depreciation in respect of the said godowns in all earlier assessment years.

45. On the basis of the aforesaid; the Tribunal came to the conclusion that though the income from the godowns is chargeable under the head “Income from house property”, as the godowns have been shown and treated as commercial assets of the company and as depreciation had been claimed and allowed on the godowns, the same remained as commercial assets of the assessee and loss from the business carried over could be set off against the income from the godowns.

46. In view of the law laid down by this court, it appears to us that the Tribunal erred in coming to the conclusion that the godowns of the assessee remained commercial assets in its hands without examining in detail the terms and conditions under which they were let out. It was also to be examined as to what extent the godowns were being used by the assessee itself for its own business.

47. The Tribunal held that the income from the godowns is chargeable under the head “Income from house property” and yet the Tribunal has directed that the carried forward business loss could be adjusted against such income. The assessee has not challenged the finding of the Tribunal that the income of the godowns is “income from house property” and such finding is now final. The direction of the Tribunal allowing the assessee to set off its carried over business loss from the income of the godowns, in our view, appears to be clearly erroneous. In that view, if we answer question No. 3 for the assessment year 1971-72, the answers to question Nos. 1 and 2 might become academic.

48. For the reasons given above, we answer question No. 3 in the negative and in favour of the Revenue. We decline to answer questions Nos. 1 and 2 as the relevant evidence has not been collated or considered by the authorities below and also as by reason of our answer to question No. 3, the answer to questions Nos. 1 and 2 has become academic. In the facts and circumstances, there will be no order as to costs.

G.N Ray, J.:— I agree.