THE issue before the Bench is - Whether valuation of any property given on rent by an assessee company to its licensee, is required to be included in the total wealth of the assessee, if such licensee and assessee, though under same management, treat each other as separate entities. And the verdict goes against the assessee.
Faccts of the case
The assessee company is engaged in the business of manufacturing bed sheets, table cloth & napkins. These items are manufactured by the assessee with the help of its subsidiary company i.e., M/s Dior International Pvt. Ltd., which hepls the assessee in doing processing work, namely, cutting of cotton fabrics and dying etc. in a part of the factory building situated at Sahibabad. Dior installed its own machinery for the said job work of dyeing and the assessee used to charge a sum of Rs.20,000/- per month as license fee from it. The said sum of Rs.20,000/- charged by assessee as license fee was claimed to be business income. Further, the job work undertaken by Dior, though done wholly for the assessee, was nonetheless charged to the assessee's account and paid for by the assessee. Upon consideration of the matter, the AO held that the part of the building given to Dior on licence was not being used for assessee's own business and therefore, the assessee was not entitled to exemption in respect of the said part of the Sahibabad building property. On appeal, the CIT(A) confirmed the order of AO. He, however, opined that the AO should refer the matter to the Valuation Officer u/s 16A(1)(b)(ii) for the valuation of the portion given on rent by the assessee to its licensee. On further appeal, the Tribunal upheld the order of CIT(A) by holding that no doubt, Dior 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. The Tribunal also opined that a portion of the building belonging to assessee was in fact used by Dior for its own use of manufacturing activity and consequently, it could not 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 AO as well as the CIT(A) in the net wealth of assessee. On further appeal, the High Court confirmed the order of the Tribunal.
Having heard the parties, the Supreme Court held that,
++ this court is of the view that the judgments of the lower authorities, 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 counsel for assessee 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 present assessee and Dior are doing their own business and are separately assessed as such. It is noticed that the charging of Rs.20,000/- per month as licence fee by the assessee from Dior 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, for the job work done by Dior, it was charging the assessee and this again established that two companies preserved their individual corporate personalities so far as the present transaction is concerned;
++ it is seen that this court in the case of CIT, Kerala v. Malayalam Plantations Ltd., held that the expression "for the purpose of the business" is wider in scope than the expression "for the purpose of earning profits". It may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery. It may comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on a business. However wide the meaning of the expression may be, its limits are implicit in it. This Court further held that 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. 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. From the facts of the present case, it is clear that the assessee has not incurred anything in its capacity as the person carrying on the business. At the same time, Dior in its separate individual capacity has carried on on its own business. This Court, therefore, dismiss the assessee's appeal, agreeing with the reasoning of the Tribunal, which has found favour with the High Court.
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