Case: Kapri International (P) Ltd Vs. Commissioner of Wealth Tax

1. In this case we are concerned with wealth tax on a property situated at Plot No.39, Site IV, Sahibabad. The concerned assessment year is 1984-1985. The facts are that the appellant before us is a company which manufactures bed sheets. It contends that its own subsidiary company namely, M/s Dior International Pvt. Ltd., is a company under the same management and is doing processing work, namely, dyeing, for the assessee company in a part of the factory building situate at the aforesaid property. It is not disputed that M/s Dior International Pvt. Ltd. installed its own machinery for the said job work of dyeing and that the assessee charged a sum of Rs. 20,000/- per month as license fee from M/s Dior International Pvt. Ltd.2. He said sum of Rs. 20,000/- per month charged as license fee has been claimed by the assessee to be business income. Further, it is also clear that the job work undertaken by M/s Dior International Pvt. Ltd., though done wholly for the assessee, was nonetheless charged to the assessees account and paid for by the assessee. The question that arises on the facts in this case is whether under Section 40(3)(vi) of the Finance Act, 1983, "the building" is used by the assessee as a factory for the purpose of its business. Section 40(3) is set out herein below: "The assets referred to in sub-section (2) shall be the following, namely :-(i) gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals (not being any such precious metal or alloy held for use as raw material in industrial production;(ii) precious or semi-precious stones whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;(iii) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;(iv) utensils made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals;(v) land other than agricultural land;(Provided that nothing in this clause shall apply to any unused land held by the assessee for industrial purposes for a period of two years from the date of its acquisition by him;)(vi) building or land appurtenant thereto, other than building or part thereof used by the assessee as factory, godown, warehouse, hotel or office for the purposes of its business or as residential accommodation for its employees or as a hospital, enter, school, canteen, library, recreation enter, shelter, rest-room or lunch room mainly for the welfare of its employees and the land appurtenant to such building or part :(vi) (a) any building used as residential accommodation in the nature of a guest house and land appurtenant thereto;(vi) (b) any building and the land appurtenant to such building used as residential accommodation by any director, manager, secretary or any other employee of the assessee, such employee holding not less than one per cent of the equity share of the assessee or by any relative of any person who holds not less than one per cent of the equity share of the assessee." 3. By an order dated 9th March, 1989, the assessing authority held that on these facts they had no hesitation in holding that the part of the building given to M/s Dior International Pvt. Ltd. on licence is not being used for the assessees own business and therefore, the assessee is not entitled to exemption in respect of the said part of the Sahibabad building property. On an appeal to the Commissioner of Income Tax (Appeals), the Commissioner by judgment dated 28th January, 1993 agreed with the assessing authority and dismissed the appeal. The Commissioner opined that the assessing officer should refer the matter to the Valuation Officer under Section 16A (1)(b)(ii) for the valuation of the portion given on rent by the appellant company to its licensee. In a further appeal to the Income Tax Appellate Tribunal, the Income Tax Appellate Tribunal agreed with the view of the authorities below and dismissed the appeal. It held as follows: "The expression "used by the assessee as factory. for the purpose of its business" used by the legislature in the aforesaid clause clearly shows that the building or part of such building which is to be excluded from the net wealth must be used by the assessee as factory for the purpose of its own business.In the present case, there is no dispute that a portion of the building was let out to its sister concern M/s Dior International P. Ltd. which is a subsidiary company of the assessee at rent of Rs. 20,000/- p.m. Further, the AO has given a finding that it was M/s Dior International P. Ltd. which had installed the machinery for the purpose of its own business of manufacturing of ready made garments. This factual aspect is not controverted by the assessee. The Honble Bombay High Court in the case of Phalton Sugar Works, 208 ITR 989 has held that the business of the subsidiary company cannot be considered as business of parent company. In the eye of law, both are independent entities. No doubt, M/s Dior International P. Ltd. was manufacturing the garments for the assessee but it was charging the price for the same from the assessee and assessee was charging rent for the use of the premises.Therefore, the only relationship between the parties was that of the lessor and lessee and nothing else. Therefore, the contention of the assessee that M/s. Dior International was manufacturing the garments for the assessee, in our opinion, would not advance the case of the assessee and is, therefore, rejected. In view of the above discussion, it is held that a portion of the building belonging to assessee was in fact used by M/s. Dior International for its own use of manufacturing activity and consequently, it cannot be said that such portion of building was used by the assessee for the purpose of its own business of manufacturing as factory. Therefore, such portion of the building was rightly included by the lower authorities in the net wealth of the assessee company.However, in clause (vi) of sub section (3) of Section 40 of Finance Act, 1983, the legislature has specifically provided that building must be used as factory by the assessee himself. In view of this distinguishing factor, the said judgment of the Honble Supreme Court cannot be applied to the present case. The observations of the Honble Supreme Court at page 314 of 231 ITR, on which reliance was placed by the learned counsel for the assessee, do not advance the case of the assessee in as much as those observations were made in the context of the language of Section 32A. In the present case, it is not the case of the assessee to lease out the building. Further, mere user for the purpose of business is not sufficient for the purpose of claiming exemption u/s 40 of Finance Act, 1983. As observed earlier, the use must be by the assessee himself as factory, that is, for the purpose of business of manufacturing carried on by him. Since in the present case admittedly the premises were actually used by the lessee and not by the assessee, we are unable to accept the contention of the learned counsel for the assessee." 4. Mr. Sabharwal, learned Senior counsel for the appellant, has argued two points before us and has relied on a number of judgments. According to learned counsel, the object sought to be achieved by Section 40 is paramount. He pointed out that wealth tax was abolished so far as companies were concerned by the Finance Act, 1960 and revived qua closely held companies only by Section 40 of the Finance Act, 1983 w.e.f. the assessment year 1984-1985. The object according to learned counsel was to tax non-productive assets and it is clear that on facts according to learned counsel the present is a case of a productive asset as part of the building was used "for the purpose of the assessees business". Further, learned counsel stated that not only must the object of the section be viewed to arrive at the true interpretation of Section 40 but equally this being a commercial transaction it must be looked at commercially and if looked at commercially it is clear that the assessee really undertakes various processes under the same roof by itself and by a sister concern, both being under the same management and therefore, the asset, namely, the building, is used by the assessee commercially speaking for the purpose of the assessees own business. 5. Mr. Guru Krishan Kumar, learned Senior counsel on behalf of the respondent drew our attention to the assessment order, the Commissioner of Income Tax (Appeals) order and the Tribunal order referred to herein above and argued that it was very difficult to pierce the corporate veil in a case like the present and stated that the two companies are separate entities in law even though they are under the same management. He pointed out that in fact Rs. 20,000/- per month charged as licence fee and treated as income from business so far as the assessee was concerned showed that the transaction in the present case was at arms length and that both companies therefore observed the corporate form and did not behave as part of a single group. He further added that the fact that the job work done by M/s Dior International Pvt. Ltd. was charged for by the assessee company further buttresses this submission. 6. The judgment under appeal passed by the High Court of Delhi is a short one page judgment referring to the Tribunal and agreeing with its reasoning. We are of the view that the judgments of the authorities below, the Tribunal and the High Court are correct for the reason that it is well settled that in a taxing statute one goes by the plain language used. It is only in cases of ambiguity that one can construe the language in accord with the object sought to be achieved. Going by the plain language it is clear that the learned Senior counsel appearing on behalf of the appellant is only partially correct in that user of the building is established on the facts of the case and, therefore, the asset of the company is being used productively and not otherwise. However, super-added to this condition is another condition, namely, that such user must be "by the assessee". Not only must it be by the assessee but it must also be "for the purpose of its business". It is clear on the facts here that the appellant before us and M/s Dior International Pvt. Ltd are doing their own business and are separately assessed as such. Mr. Guru Krishan Kumar, learned Senior counsel is right in contending that on facts the charging of Rs. 20,000/- per month as licence fee by the appellant assessee from M/s Dior International Pvt. Ltd. changes the complexion of the case. It is clear that once this is done, the two companies, though under the same management, are treating each other as separate entities. Also, he correctly pointed out that for the job work done by M/s Dior International Pvt. Ltd., M/s Dior International Pvt. Ltd. was charging the assessee company and this again established that two companies preserved their individual corporate personalities so far as the present transaction is concerned. 7. Shri Sabharwal cited a judgment of this Court reported in 53 ITR 140 (SC) in the case of Commissioner of Income Tax, Kerala v. Malayalam Plantations Ltd., and brought to our notice a passage at page 150 which reads as follows:- "The aforesaid discussion leads to the following result: the expression "for the purpose of the business" is wider in scope than the expression "for the purpose of earning profits". Its range is wide: it may take in not only the day to day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business." 8. It is true that the expression "for the purpose of the business" may be wide but as the judgment says its limits are also clear. The expenditure incurred therefore, will have to be for the carrying on of the business and the assessee shall incur it in its capacity as a person carrying on the business. On facts here it is clear that the assessee, namely, M/s. Kapri International (P) Ltd., the appellant before us, has not incurred anything in its capacity as the person carrying on the business. On the other hand, it is clear on facts that it is M/s Dior International Pvt. Ltd. in its separate individual capacity that is carrying on its own business. This case is, therefore, clearly distinguishable on facts. 9. He also cited before us a judgment reported in 20 ITR 451 (SC) in the case of Commissioner of Excess Profits Tax, Bombay City v. Shri Lakshmi Silk Mills Ltd. where the controversy was whether, when a dyeing plant of a company remains idle because of difficulty in obtaining raw material, and it was temporarily let out, the amount received in the hands of such company could be treated as business income. The passage cited at page 455-456 of the report again makes it clear that this judgment does not in any manner further the argument of the assessee in the present case. It goes as far as saying that on the facts here Rs. 20,000/- licence fee per month ought to be treated as business income. This may well be correct but as we have pointed out herein above, this fact does not further the assessees case in that the very factum of charging Rs. 20,000/- per month makes it clear that the assessee treated itself as a corporate personality separate from its subsidiary. 10. Learned counsel for the appellant then cited a judgment of this Court reported in 288 ITR 1 (SC), namely, S.A. Builders Ltd. v. Commissioner of Income Tax in which a question arose in the context of Section 36 of the Income Tax Act as to whether an interest free loan given to a sister concern can be said to be "for the purpose of business". This does not take the assessee very much further. An interest free loan may well on facts be treated to be "for the purposes of business" so far as Section 36 of the Income Tax Act is concerned. However, on facts here we are concerned with a very different provision in which user of premises has to be by the assessee itself and not by its sister concern. This case is also distinguishable on facts. 11. Learned counsel also cited a full Bench judgment of the Madras High Court in the case of Commissioner of Wealth Tax v. Fagun Co. P. Ltd. reported in 286 ITR 297 (FB) and drew our attention to a passage at page 313-314 of the report. In that case, assets were let out by a leasing company doing leasing business. On the facts therefore, it was held that such leased assets would be treated as being for the purpose of business in that case. This judgment also does not carry the appellants case any further.

Decision reasoning: 0[ds]8. It is true that the expression "for the purpose of the business" may be wide but as the judgment says its limits are also clear. The expenditure incurred therefore, will have to be for the carrying on of the business and the assessee shall incur it in its capacity as a person carrying on the business. On facts here it is clear that the assessee, namely, M/s. Kapri International (P) Ltd., the appellant before us, has not incurred anything in its capacity as the person carrying on the business. On the other hand, it is clear on facts that it is M/s Dior International Pvt. Ltd. in its separate individual capacity that is carrying on its own business. This case is, therefore, clearly distinguishable onpassage cited at pageof the report again makes it clear that this judgment does not in any manner further the argument of the assessee in the present case. It goes as far as saying that on the facts here Rs. 20,000/licence fee per month ought to be treated as business income. This may well be correct but as we have pointed out herein above, this fact does not further the assessees case in that the very factum of charging Rs. 20,000/per month makes it clear that the assessee treated itself as a corporate personality separate from itsthat case, assets were let out by a leasing company doing leasing business. On the facts therefore, it was held that such leased assets would be treated as being for the purpose of business in that case. This judgment also does not carry the appellants case anydoes not take the assessee very much further. An interest free loan may well on facts be treated to be "for the purposes of business" so far as Section 36 of the Income Tax Act is concerned. However, on facts here we are concerned with a very different provision in which user of premises has to be by the assessee itself and not by its sister concern. This case is also distinguishable on facts.