The Judgment of the Court was delivered by

A.N Sen, J.:— In this reference under section 256(1) of the Income-tax Act, 1961, the following two questions of law have been referred to this court:

“1. Whether, on the facts and in the circumstances of the case, the rent received from the factory sheds and electric installations belonging to the assessee was assessable either under section 28 or under section 56(2)(iii) of the Income-tax Act, 1961?

2. Whether, on the facts, and in the circumstances of the case, the Tribunal was correct in holding that the rent from non-factory buildings including godowns should be assessed under the head ‘Business’ and not under section 22 of the Income-tax Act, 1961?”

2. The statement of the case relates to the assessment years 1962-63 to 1964-65, the corresponding accounting years being the calendar years 1961, 1962 and 1963, respectively. The statement of the case sets out the relevant facts which may, however, be indicated. The assessee-company was incorporated on July 31, 1959, and closed its accounts on December 31, 1960. In the assessment year 1961-62, the assessee derived income from ground rent and the same was assessed under the head “Other sources”., For the assessment years 1962-63 to 1964-65, the assessee claimed that the entire rental income should be assessed under the head “Business”. The Income-tax Officer computed the total incomes for these years as under:

1962-63 1963-64 1964-65 Rs. Rs. Rs. Property … 5,956 10,625 10,755 Business … 113 — 1,705 Interest … — 105 — Other sources … 2,339 — — 8,408 10,730 12,460 Less: Business loss — 966 — Total income 8,408 9,764 12,460

3. While doing so, the Income-tax Officer treated the rental income either as from property or as from other sources.

4. In appeal, the Appellate Assistant Commissioner has found that in the assessment year 1962-63, the assessee derived income from letting out factory sheds (assessed by the Income-tax Officer under the head “Property”) and lease-rent from the letting out of the open plot ot lands (assessed by the Income-tax Officer under the head “Other sources”). In the assessment year 1963-64, some godowns constructed on the open lands were also let out and this year the lease rent from the godowns and from the factory sheds was assessed under the head “Property”. He further found that the factory lands and godowns were hired out to—(1) Messrs. Bombay Hardware Mart, (2) Messrs. Ajmera Engineering Works, and (3) Messrs. West Bengal Pipe Dealers. According to the assessee, one of the main objects of the company was manufacture of pipe fittings and that it was in pursuance of this object that it constructed factory sheds fitted with electrical installation. The manufacturing business could not be started for want of certain machinery for which it had obtained import licences. It was claimed that the assets which were let out were the assessee's commercial assets and the income derived therefrom was assessable under the head “Business”. The Appellate Assistant Commissioner held that the assessee was yet to start its manufacturing business and because the assets had been let out in the meanwhile, they had not yet become commercial assets so that the rental income was correctly assessed under the head “Property”. For the assessment year 1964-65 the Appellate Assistant Commissioner passed a similar order confirming the assessment under the head “Property”. Further appeal was preferred by the assessee before the Tribunal against the order of the Appellate Assistant Commissioner. Before the Tribunal the assessee relied on its objects (1) to (3) of the object clauses of its memorandum of association and the said object clauses read as follows:

“(1) To carry on the business of manufacturers, importers, exporters, distributors and dealers of pipes, tubes and fittings, iron and steel materials, hardware goods, machineries and plants, mill stores, metals and metal products, scraps, tools and implements, tubewell and boring requisites, minerals and such other articles.

(2) To purchase, take on lease or in exchange or otherwise acquire lands, buildings, or estate or any interest in or rights connected with any such lands, buildings or estate, to erect or construct office premises, workshops, factories and mills for the manufacture of pipes and fittings and hardware goods and all articles which form parts of such pipes and fittings and hardware goods and the machineries which are and may be necessary for the manufacture and to prepare such articles.

(3) To erect, construct and purchase or otherwise acquire any land, houses, buildings and premises, offices, workshops, factories and mills and any fixed or movable machinery, tools, engines, boilers, plants, implements patterns, stock-in-trade and patent rights convenient to be used in or about the trade or business of manufacturers of pipes, fittings, etc., engineers, founders, smiths or machinists, or for any other business of the company.”

5. It was pointed out that the assessee constructed factory sheds and also made electrical installations and the position as apparent from the balance-sheet was as under:

Additions as on 31-12-1960 31-12-1961 31-12-1962 31-12-1963 Rs. Rs. Rs. Rs. Land and buildings 1,59,181 nil nil nil Factory sheds 25,566 38,180 nil 29,908 Electric installations 10,680 983 778 nil

6. The Tribunal's attention was drawn to the-letter from the Ministry of Steel and Heavy Industries, Government of India, approving the grant of licence for the import of plant and machinery valued at Rs. 11.75 lakhs for the manufacture of M.I Pipe fittings and the import permit was available for a period of two years. The electrical installation was practically complete by December 31, 1960. and the factory shed by December 31, 1961. In 1963, certain godowns were constructed on the open land. The electrical installations comprised a ISO K.W transformer set. In 1961 high tension wires were fitted and low tension wires were ‘removed. It was submitted on behalf of the: assessee that in’ the “way in which the factory sheds and electrical installations were completed,” the ‘assets’ could be used only for ‘the purpose of business, whether by the assessee or by’ some-body else. It was not a residential property. The factory shed and installations could be used for manufacturing purposes and the godown for the “purpose of storing raw materials. On behalf of the assessee a reference was made to the decision of the Supreme Court in the case of ” Karanpura Development Co. Ltd. v. Commissioner of Income-tax [1962] 44 ITR 362 SC. and also to the decision in the case of Commissioner of Income-tax v. Calcutta National Bank Ltd. [1959] 37 ITR 171 SC., and it was submitted that the entire income should be assessed under the head “Business”.

7. The Tribunal found that the factory shed with electrical installation was peculiarly suited only for manufacture or industrial purposes. Further, the high tension wires and transformer, which were installed thereon, could only be utilised along with the factory shed. Since the assessee had not commenced the business of manufacture, the Tribunal held that the hire of factory sheds and electrical installations fell within the scope of section 56(2)(iii) of the 1961 Act. As regards the hire of the vacant land the Tribunal was of the opinion that it was assessable under the head “Other sources”. The assessee had utilised the factory buildings including godowns for the purpose of its own business of purchase and sale of pipe fittings and only let out the surplus portion. The Tribunal held that the rental from non-factory building would be assessable under, the head “Business”. On the basis of the aforesaid findings the Tribunal referred to this court the two questions which we have set out.

8. We may incidentally note that the Commissioner suggested before the Tribunal four questions of law. Of the four questions the Tribunal was of the view that two questions did not really involve any question of law and the two questions which the Tribunal has referred to this court involved questions of law. It is further to be noted that when copies of the draft statement of the case were sent to the parties it was pointed out by the assessee that the rent from its factory shed and electrical installations was claimed to be income from business or other sources and the assessee suggested without making any application that question No. 1 should be modified to bring out the true question and the Tribunal had in fact modified the said question No. 1 and the question No. 1 which has been referred to this court is the modified question as suggested by the assessee.

9. Mr. B.L Pal, learned counsel appearing on behalf of the department, has submitted before us that, on the basis of the findings recorded by the Tribunal, this court in answering the question No. 1 should hold that the rent received from the factory sheds and electrical installations belonging to the assessee was neither assessable under section 28 nor under section 56(2)(iii) of the Income-tax Act, 1961, and the said income was only assessable under section 22 of the Act. Mr. Pal in this connection has drawn our attention to the relevant findings of the Tribunal on this aspect which are contained in paragraphs 3 and 7 of the order of the Tribunal. In paragraph 3 the Tribunal has held:

“The lessees of these assets were M/s. Bombay Hardware Mart, M/s. Ajmera Engineering and M/s. West Bengal Pipe Dealers. There were no written agreements. It was not clear as to what was let out to each of the lessees. One of the lessees was the manufacturer of pipes and the assets let out to it were utilised for manufacturing activities. The manufacturing business could not be started by the assessee for want of certain machinery for which it had obtained import licence. It was claimed that the assets which were let out were the assessee's commercial assets and the income derived therefrom was assessable under the head ‘Business’.”

10. In paragraph 7 the Tribunal has held:

“In our opinion, the factory shed with the electric installation was peculiarly suited only for manufacturing purposes. The high tension wire and the transformers were installed therein and they could not be utilised separately from the factory shed. We would, therefore, hold that the rent received from the factory shed and electric installations would be assessed under section 56(2)(iii).and that appropriate deduction including depreciation should be allowed. If the assessee had already commenced business and then let it out the position might have been different.”

11. Mr. Pal had argued that in the instant case there are no written documents to show the nature of the letting out or the purpose of the same. Mr. Pal contends on the basis of the aforesaid finding it cannot be said that the true intention was to let out the factory shed and the equip ments therein together and that one could not be let out unless the other was also let out along with the same. It is the contention of Mr. Pal that this intention is the guiding factor in determining the true character of the income and in deciding under which particular section the same has to be assessed. Mr. Pal in this connection has referred to the decision of the (Supreme Court in the case of Sultan Brothers Private Ltd. v. Commissioner of Income-tax. Mr. Pal has also relied on the decision of the Madras High Court in the case of Commissioner Of Income-Tax, Madras Ii v. Central Studios (P.) Ltd. has further commented that the object clauses which have been referred to do not indicate that it was one of the objects of the assessee-company that the assessee could derive business income by letting out the aforesaid properties. It is the submission of Mr. Pal that the income received by the assessee by letting out its factory shed and electric installations should be income from house properties under section 22 of the Act and the Tribunal should have proceeded, if necessary, to apportion the rent realised by the assessee by letting out the factory shed along with the equipment contained in it. Mr. Pal has, therefore, submitted that so far as the question No. 1 is concerned this court should answer that, so far as the rent received from the factory sheds is concerned, the same cannot be assessed either under section 28 or under section 56(2)(iii) of the Income-tax Act, 1961, and the said income realised from the factory sheds should be apportioned and should be assessed under section 22 of the Act. On the question No. 1 Mr. Pal has further submitted that in any event this court cannot hold and should not hold that the said income is the business income of the assessee as, according to Mr. Pal, there is really no proper question on that aspect in the absence of any application by the assessee to the Tribunal. Mr. Pal has contended that the Tribunal should not have referred that aspect of the question on the mere suggestion of the assessee without a proper application by the assessee and the reference with regard to that aspect of the question is not really competent.

12. So far as the question No. 1 is concerned Mr. Mukherjee, learned counsel, has submitted before us that the said income should really be considered to be the business income of the assessee. According to Mr. Mukherjee, the assessee has really exploited one of its commercial assets and this the assessee has done through other agencies and not by itself. Mr. Mukherjee contends that it is open to the assessee to exploit its commercial assets even through others and if the assessee, instead of exploiting its commercial assets itself, exploits the same through others, the income derived by the assessee is its business income. Mr. Mukherjee, in support of his submission, has referred to the decision of the Supreme Court in the case of Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. and he has also relied on the decision of the Supreme Court in the case of Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax. Mr. Mukherjee has further submitted that in the instant case the letting out is not the letting out of a bare tenement but is a case of letting out of complex nature providing industrial equipments, and income derived from such letting out should be regarded as income from business. In support of his submission Mr. Mukherjee has referred to the decision of the Bombay High Court in the case of Commissioner of Income-tax v. National Storage Private Ltd. [1963] 48 ITR 577 Bom. which was affirmed by the Supreme Court and the decision of the Supreme Court is reported in Commissioner of Income-tax v. National Storage Pvt. Ltd. [1967] 66 ITR 596 SC. Mr. Mukherjee has further submitted that the entire case of the assessee before the Tribunal was that this entire income should be considered to be business income and, if necessary, this court should really reframe the question and it is his submission that even within the frame of the question it is open to this court to hold that the said income is the assessee's business income. Mr. Mukherjee has finally submitted that under no circumstances the said income can be said to be income from property and if the said income is not considered to be business income the said income must be considered income derived from other sources.

13. On the facts found by the Tribunal in the instant case we are of the opinion that the Tribunal was justified in holding that the income derived by the assessee by way of rent from the factory sheds and electric installations has to be assessed under section 56(2)(iii) of the Income-tax Act, 1961. The decisions cited by Mr. Mukherjee, in our view, in the facts of the instant case are not of any great assistance. It is to be noted that in the instant case the clear finding of the Tribunal is that the manufacturing business by the assessee had not been started in the relevant years for want of certain machinery. As the assessee had not started its manufacturing business, it cannot be said that the assessee had derived its income by exploiting its commercial asset through other agencies. The Tribunal itself recognises that the position would have been entirely different if the assessee had already commenced business and had then let out the factory to other parties and under such circumstances the decision cited by Mr. Mukherjee would have been of considerable assistance. It is well settled that an assessee may exploit its commercial asset itself directly and also through others and so long as an assessee exploits its commercial asset the income derived by the assessee by exploitation of its commercial asset will be its business income. In our view, there is no substance in the contention of Mr. Pal that the income should have been assessed under section 22, in view of the clear finding of the Tribunal that the high tension wires and the transformers were installed therein and they could not be utilised separately from the factory sheds. In our opinion, the decision of the Supreme Court in the case of Sultan Brothers Private Ltd. v. Commissioner of Income-tax concludes this question. It is quite clear from the facts and circumstances of this case that the parties clearly intended that the factory shed along with the electric installations would be let out together and we have already noted that the finding of the Tribunal is that the electrical equipments installed therein were inseparable and could not be utilised separately from the factory sheds. In our view, the principles have been clearly enunciated by the Supreme Court in this particular decision and we do not consider it necessary to deal with the other cases cited from the Bar.

14. Therefore, our answer to question No. 1 will be that the rent received from the factory sheds and electric installations belonging to the assessee was assessable under section 56(2)(iii) of the Income-tax Act, 1961 and we answer the question No. 1 accordingly.

15. On the second question Mr. B.L Pal has submitted that the relevant findings of the Tribunal which are contained in paragraph 8 of the order of the Tribunal relates to non-factory buildings including godown and the findings indicate letting out of surplus portion after actual user of portions thereof by the assessee for the assessee's own business. Mr. Pal contends that on the aforesaid findings of the Tribunal it cannot be said to be a commercial asset and the income derived from such letting out cannot be considered to be business income as, according to Mr. Pal, the object clauses of the memorandum of association of the assessee-company do not mention that it was any part of the assessee's business to let out any portion of the said assets and admittedly the asset which had been let out were surplus assets. In support of his submission Mr. Pal has referred to the decision of the Supreme Court in the case of New Savan Sugar & Gur Refining Co. Ltd. v. Commissioner of Income-tax and also to the decision of the Supreme Court in the case of Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax. He has also referred to the decision in the case of Inland Revenue Commissioners v. Broadway Car Co. (Wimbledon) Ltd. and to the decision of the Supreme Court in the case of Karanpura Development Co. Ltd. v. Commissioner of Income-tax.

16. Mr. Nirmal Mukherjee, learned counsel appearing on behalf of the assessee, has contended that it is well-settled that the object clauses in the memorandum of a company have to be liberally construed. It is his further contention that the fact is clearly established that the assessee-company had let out the surplus portion of non-factory buildings including the godowns after utilising the portions which the assessee actually needed for its business. Mr. Mukherjee had contended that, though the assessee-company had not commenced its manufacturing business, the assessee-company was undoubtedly carrying on its other business activities and in the course of its other business activities the assessee-company had been using the non-factory buildings and also its godowns. It is the contention of Mr. Mukherjee that the non-factory buildings and the godowns clearly, therefore, form part of the assessee's commercial assets which the assessee exploits and utilises for its own business and the portion which the assessee did not consider it necessary to exploit itself, the assessee had exploited the same through other agencies. The income derived by the assessee by exploitation of this commercial asset is, therefore, clearly business income and the Tribunal was, therefore, justified in directing that the income realised therefrom should be assessed as business income. Mr. Mukherjee in support of his submission has referred to the decision of the Supreme Court in the case of Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 SC. and also to the decision of the Supreme Court in the case of Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax. Mr. Mukherjee has also drawn our attention to the decision in the case of Broadway Car Co. Ltd. which was considered by the Supreme Court in its decision in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax.

17. On the facts of the instant case, we do not think it necessary to consider all these decisions at any length. It is well settled that if an assessee derives any income by exploitation of its commercial assets whether by itself or through other agencies such income should normally be considered to be the business income of the assessee. In the instant case the effect of the finding of the Tribunal is that these non-factory buildings including the godowns were the commercial assets of the company which the assessee was utilising mainly for its own business purposes and portions thereof which the assessee for the time being did not consider it necessary to exploit itself, were let out and the assessee exploited the same through other agencies. As the income derived by the assessee is income derived from the exploitation of its commercial assets, the Tribunal, in our view, has rightly held that the income derived from letting out the surplus of the non-factory buildings including the godowns is the business income of the assessee.

18. We may in this connection refer to the observations of the Supreme Court at pages 772-773 in the case of Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax.:

“‘Business’ as defined in section 2(5) of the Excess Profits Tax Act includes amongst others, any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture. The first part of this definition of a ‘business’ in the Excess Profits Tax Act is the same as the definition of a business in section 2(4) of the Indian Income-tax Act. Whether a particular activity amounts to any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture is always a difficult question to answer. On the one hand it has been pointed out by the Judicial Committee in Commissioner of Income-tax v. Shaw Wallace & Co. that the words used in that definition are no doubt wide but underlying each of them is the fundamental idea of the continuous exercise of an activity. The word ‘business’ connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. On the other hand, a single and isolated transaction has been held to be conceivably capable of falling within the definition of business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade. The question, therefore, whether a particular source of income is business or not must be decided according to our ordinary notions as to what a business is. The case of Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. decided by this court is clearly distinguishable. There, the respondent-company which was formed for the purpose of manufacturing silk cloth installed a plant for dyeing silk yarn as a part of its business. During the relevant chargeable accounting period, owing to difficulty in obtaining silk yarn on account of the war, it could not make any use of this plant and it remained idle for some time. In August, 1943, the plant was let out to another company on a monthly rent. The question arose whether the income received by the respondent-company in the chargeable accounting period by way of rent was income from business and assessable to excess profits tax. It should be noted that in that case the respondent-company was continuing its business of manufacturing silk cloth. Only a part of its business, namely, that of dyeing silk yarn, had to be temporarily stopped owing to the difficulty in obtaining silk yarn on account of the war. In such a situation, this court held that part of the assets did not c???ase to be commercial assets of that business since it was temporarily put to different use or let out to another and accordingly the income from the assets would be profits of the business irrespective of the manner in which that asset was exploited by the company. This court clearly indicated that no general principle could be laid down which would be applicable to all cases and that each case must be decided on its own circumstances according to ordinary common sense principle.”

19. In the instant case, as we have earlier noticed, the assessee was carrying on business and in the course of its trading activities the assessee was using and exploiting the non-factory buildings including its godowns. The non-factory buildings including the godowns, therefore, clearly constituted the commercial assets of the assessee; and as we have earlier noted the effect of the finding of the Tribunal is that the non-factory buildings including the godowns are the commercial assets of the assessee-company. 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 the assessee 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 business income of the assessee.

20. The second question must, therefore, be answered in the affirmative in favour of the assessee and against the revenue and we answer the second question accordingly.

21. In the facts of the instant case we have to observe, and this we do with some amount of regret, that this case was not a fit case, where a reference should at all have been applied for by the department, and the amount of tax involved in the present case is indeed meagre and compared to the costs incurred will indeed be insignificant, and of no benefit to the revenue. It is indeed likely that the amount of costs incurred would be much greater than the amount of tax involved in the proceeding. It cannot also be said that though the amount involved might have been small, important principles were involved in the present proceedings. The principles, to our mind, appear to be well settled. The department shall pay the costs of this reference to the assessee.

R.N Pyne, J.:— I agree.