CASE STUDY OF “RAMPUR INDUSTRIES LTD VS

COMMISSIONER OF INCOME TAX. [1971] 82 ITR 281

Case: Rampur Industries Ltd vs. Commissioner of Income Tax

Citation: (1971) 82 ITR 281

i. Facts
This is a reference under Section 66 of the Indian Income Tax Act, 1922. Messrs. Rampur
Industries Ltd. is the assessee. The assessment year is 1960-61. The assessee is a limited
company incorporated in the year 1939. Formerly, its business consisted of running an oil mill
and manufacturing soap. The company had its godowns, plant and machinery for those purposes.
In the year 1948-49, the oil mill business was stopped. In the year 1951-52, soap manufacturing
business was also stopped; but the assessee started rice-milling business. Rice milling business is
still continuing. The assessee found that after stoppage of the oil mill and soap business, certain
godowns belonging to the assessee had fallen vacant. Those godowns were let out to the U. P.
Government and the Central Government for storing grain during the accounting year. The
assessee received a sum of Rs. 9,906 towards rent for those godowns. This receipt was assessable
as income during the assessment year. The assessee urged that receipt of Rs. 9,906 should be
treated as income from business.

ii. Procedural History

The assessee urged that receipt of Rs. 9,906 should be treated as income from business. The
Income Tax Officer, however, took the view that this was the assessee's income from property.
This view was upheld in appeal by the Appellate Assistant Commissioner and by the Appellate
Tribunal. At the request of the assessee, the Appellate Tribunal, Delhi Bench "A", has referred
the following question of law to this court.

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iii. Legal Issue
1) Whether the income amounting to Rs. 9,906 fell under Section 9 or under Section 10 of
the Act.

iv. Argument/Reasoning

The assessee urged that receipt of Rs. 9,906 should be treated as income from business. The
Income Tax Officer, however, took the view that this was the assessee's income from property.

From the standpoint of the department, the present case is, stronger than the case of East India
Housing and Land Development Trust Ltd. In that case the assessee-company was expressly
incorporated with the object of buying and developing landed properties. Yet it was held that
receipt from rent amounted to income from property under Section 9 of the Act. In the present
case the assessee-company was not established for earning profit from godowns. Godowns were
let out incidentally. Rent from godowns is clearly income from property for purposes of Section
9 of the Act. In a sense, that may amount to business under Section 10 of the Act. But, as
explained by the Supreme Court, if an item is covered by a specific head, it cannot be covered by
a head which touches the item only incidentally. The Tribunal was right in holding that this was
income from property; and item fell under Section 9 of the Act.

v. Precedents

In Commissioner of Excess Profits Tax v. Srt Lakshmi Silk Mills Ltd 1., 20 I.T.R. 451; [1952]
S.C.R. 1(S.C.). The assessee-company was a manufacturer of silk cloth and as part of its
business it installed a plant for dyeing silk yarn. The plant remained idle for some time. It was,
therefore, let out to a person on a monthly rent. The question was whether the sum representing
the rent realized by the assessee was chargeable to excess profits tax as profits of business or was
income from other sources. It was held that it was income from business.

1
[1952] S.C.R. 1(S.C.)

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In Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits tax 2, it was held that
letting out of the plant and machinery by the assessee-firm could not be held to fall within the
body of the definition of "business" under Section 2(5). That too was a case under the Excess
Profits Tax Act.

In Commissioner of Income Tax v. Calcutta National Bank Ltd 3. [1959] Supp. 2 S.C.R. 660
(S.C.), it was pointed out by the Supreme Court that the definition of "business" in Section 2(5)
of the Excess Profits Tax Act is wider than the definition of that term under Section 2(4) of the
Income Tax Act.

In Commissioner of Income Tax v. National Mills Co. Ltd 4. [1958] 34 I.T.R. 155 (Bom.) , a
company was carrying on the business of manufacturing textiles. The liquidator let the plant and
machinery of the company at a monthly rent for a period of three years. It was held by the
Bombay High Court that there-was material to justify the finding of the Appellate Tribunal that
the income derived from the lease of the plant and machinery was income from business. It will
be seen that in that case also what was let out was plant and machinery.

In G. R. Narasimier & Co. v. Commissioner of Income Tax 5, [1969] 73 I.T.R. 257 (Mad.), the
assessee carried on a business of running a power loom factory by manufacturing handloom
cloth in partnership. Under an agreement R was at liberty to shift the looms and accessories to a
new premises. It was held that the intention of the parties as expressed in the document being one
to create a relationship of principal and agent in relation to the working of the looms, it could not
be treated as a lease, and hence the income was assessable as income from business. It will be
seen that in that case the agreement was treated as a transaction which did not constitute a lease.
In the present case the assessee obviously let out the godowns to the Government under the
leases.

Commissioner of Income Tax v. National Storage Private Ltd., 48 I.T.R. 577 (Bom.), the
assessee-company was promoted by the aim distributors of Bombay for various objects
connected with film business. The assessee owned certain vaults. It permitted the vaults to be
2
[1959] 1 S.C.R. 952(S.C.)
3
[1959] Supp. 2 S.C.R. 660 (S.C.)
4
[1958] 34 I.T.R. 155 (Bom.)
5
73 I.T.R. 257 (Mad.)

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used by film distributors on payment of a monthly charge. It was held by the Bombay High
Court that the income which the company earned through the licence-holders could not be
regarded as income from property under Section 9 of the Income Tax Act. The activity of the
company in earning that income was a business activity. Letting out a vault may stand on a
different footing from letting out an entire building like a godown.

In C. P. Pictures Ltd. v. Commissioner of Income Tax 6, [1962] 46 I.T.R. 1181 (Bom.), the
assessee was carrying on the business of exhibiting motion pictures in its own cinema theatre. It
leased the theatre for the purpose of exhibiting motion pictures to a stranger for five years on a
monthly rent of Rs. 2,000. It was held that on a construction of the lease as a whole the income
which the assessee received from the lease of the theatre and its equipment was income from
business, and had to be assessed under Section 10 of the Act, and not under Section 12. It will be
seen that in that case the department suggested that the case fell under Section 12 of the Act.
There was, therefore, no occasion for discussing the question whether the transaction was
governed by Section 9 of the Act.

In Coringa Co. Ltd. v. Commissioner of Income Tax 7, [1966] 62 I.T.R. 523 (A.P.), the
assessee-company carried on business in rice-milling and brick manufacturing. It leased out its
rice-mill. It was held that the commercial activity of the assessee-company was in two directions,
viz., letting out the rice mill and manufacture of bricks. The case was governed by Section 10 of
the Act. The main controversy is that case appears to be whether the second proviso to Section
10(2)(vii) applied or not.

In Lakshmi Industries (Private) Ltd. v. Commissioner of Income Tax 8, [1961] 41 I.T.R. 645
(Mad.), the assessee-company owned an oil and rice mill. The entire mill was leased during the
relevant year at a rent of Rs. 3,000 per month. It was held that the assessee was entitled to carry
forward and set off the loss of earlier years against the income of the relevant year.

In East India Housing and Land Development Trust Ltd. v. Commissioner of Income Tax 9,
[1961] 42 I.T.R. 49 (S.C) the appellant-company was incorporated with the object of buying and
6
[1962] 46 I.T.R. 1181 (Bom.),
7
[1966] 62 I.T.R. 523 (A.P.),
8
[1961] 41 I.T.R. 645 (Mad.),
9
[1961] 42 I.T.R. 49 (S.C)

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developing landed properties and promoting and developing markets. The question arose
whether income realised from tenants of shops and stalls was liable to be taxed as business
income under Section 10 of the Act or as income from property under Section 9. It was held by
the Supreme Court that income derived by the company from shops and stalls was income
received from property, and fell under the specific head described in Section 9.

Distinct heads specified in Section 6 of the Income Tax Act indicating the sources are mutually
exclusive, and income derived from different sources falling under specific heads has to be
computed for the purpose of taxation in the manner provided by the appropriate Section. If the
income from a source falls within a specific head set out in Section 6, the fact that it may
indirectly be covered by another head will not make the income taxable under the latter head.

vi. Holding
The rental income of Rs. 9,906 was chargeable to tax under Section 9 of the Indian Income Tax
Act, 1922. The answer to the question is against the assessee. The assessee shall pay the
Commissioner Income Tax, U. P., Rs. 200 as costs of the reference.

vii. Ratio/ Principle of the case

Section 10 deals with business. Sub-section (1) of Section 10 states: "The tax shall be payable by
an assessee under the head 'profits and gains of business, profession or vocation' in respect of the
profits or gains of any business, profession or vocation carried on by him." Section 9 deals with
property. Sub-section (1) of Section 9 states : "The tax shall be payable by an assessee under the
head 'Income from property' in respect of the bona fide annual value of property consisting of
any buildings or lands appurtenant thereto of which he is the owner, other than such portions of
such property as he may occupy for the purposes of any business, profession or vocation carried
on by him the profits of which are assessable to tax."

Indeed, with the exception of an Agreement in that respect, earnings of a corporation could be
subject to tax u/s. 9.

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viii. Case Comment

In the case of Rampur Industries Ltd vs. Commissioner of Income Tax, The Rampur industries
this was incorporated in the year 1939. The assessment year is 1960-61, the industry used to
manufacture the soap, oil mils and they also used have the godowns, plant and machinery for
those purposes. Soap manufacturing business was also stopped; but the assessee started rice-
milling business. Rice milling business is still continuing.

The assessee found that after stoppage of the oil mill and soap business, certain godowns
belonging to the assessee had fallen vacant. Those godowns were let out to the U. P. Government
and the Central Government for storing grain during the accounting year. The assessee received
a sum of Rs. 9,906 towards rent for those godowns. This receipt was assessable as income during
the assessment year.